Banking, India: I
This is a collection of articles archived for the excellence of their content.
The Times of India, Aug 22 2016
India's first joint stock bank was established in 1720 in Mumbai. This was followed by the setting up of a similar bank in Kolkata in 1770 and, later, in many other cities. Because of the growing need for modern banking services, of uniform currency to streamline foreign trade and to manage the remittances of British Army personnel and civil servants, three Presidency Banks were established in Mumbai, Kolkata and Chennai. Apart from normal banking, these banks could also issue currency until 1861.During the same period, there was a significant increase in privately-owned commercial banks and, by 1913, there were 56 commercial banks operating in India. The First World War and the Great Depression exposed the flaws of banking in India as many banks failed and the need for a cent ral bank to ensure regulatory safeguards was felt.
1969: Nationalisation and political misuse
The Times of India, April 10, 2016
Banks will remain political fiefdoms till privatized
Public sector banks are losing huge sums and running up gargantuan bad debts. Defaulters like Vijay Mallya, once politically powerful, are fleeing abroad. India's banking crisis is fundamentally political, not financial.
The left, predictably, blames wicked busi nessmen, saying the banking system has become a fiefdom of big business. Rubbish! The banks were indeed fiefdoms of big business before 1969. Then Indira Gandhi nationalized them to make them the fiefdoms of politicians. That's the root of today's crisis.
Indira and her socialist acolytes claimed bank nationalization was essential for the state to capture the commanding heights of the economy , and channel bank lending to top social priorities.Actually , she could have ordered private banks to lend to favoured sectors (as is done today) without nationalization.
Her real aim was to control all big finance, emasculating the businessmen and maharajas leading the Swatantra Party , the main opposition party after the 1967 election. She nullified the treaties Sardar Patel had signed with the princes to persuade them to accede to India in 1947. She abolished their privy purses and made them taxable, bankrupting them.
She raised income-tax rates to 97.75%, added a wealth tax of 3.5%, nationalized several other industries, and made it clear to businessmen that dissenters would be crushed. The ploy succeeded. The Swatantra Party collapsed, and businessmen crawled.
However, the poverty ratio did not fall at all after 1947 till 1983. Meanwhile, the population doubled, so the absolute number of poor doubled. That terrible human cost exposes the fraudulent intent and outcome of Indira's Garibi Hatao policies, spearheaded by bank nationalization.
Did nationalization spur lending to “the people“? As Orwell said, in socialism all are equal, but some are more equal than others. Most equal of all was Sanjay Gandhi, Indira's son, who sought unending loans for his dud car project. Anyone opposing Sanjay -including R K Hazari, deputy RBI governor, and R K Talwar, chairman of the State Bank of India -got marching orders. After that, bank chiefs obediently followed orders (official or unofficial) from top politicians. That's the genesis of today's bank misgovernance and losses. The economy has grown 50 times since, so the misgovernance and losses have risen too. But in essence, Vijay Mallya is simply a new avatar of Sanjay Gandhi.
After Talwar's travails, pre-nationalization financial discipline was quickly destroyed. Loans were given to dud businesses and dud social projects (like loan melas to woo political vote banks). How many defaulters did nationalized banks remove from control of their businesses? Virtually none, since they had all bought political protection. Regional rural banks (RRBs) did indeed penetrate the countryside, a social plus. But they lost vast sums and had to be merged with the big banks.
By the early 1980s, the bad loans of banks exceeded their equity capital. Technically , they were bankrupt. But given government ownership, that was not even news. After all, public sector behemoths had always lost huge sums, and been replenished indefinitely by the taxpayer.
By the 1980s, nationalized banks were okaying highly inflated project costs that enabled promoters to skim off the excess. Banks “evergreened“ bad loans (renewing them indefinitely) instead of admitting they were unpayable, taking over the assets of borrowers and auctioning them. Unpaid and unpayable dues were listed as “receivables“. And all receivables, believe it or not, were classified as “income“, even though nothing was coming in.
Banking doyen Narayan Vaghul told me at the time that most bank profits were fictional, since they were based on receivables that were never received. On this fictional income the banks declared profits, and even paid corporate tax. And those that had no cash borrowed money to pay the taxes! That sad farce has continued ever since, in greater or lesser measure. Politicians have continued phoning bank managers.And at budget time finance ministers announce a host of schemes to be financed by the banks, a political diktat.
Governments have the right to lay down lending priorities.But bank funds are actually the resources of citizen savers, not the government. So, politicians should not force banks to hold loan melas for vote banks, or go easy on favoured borrowers.
Modi has brought in reforms aiming to provide more honest, independent bank chiefs and boards. This may improve matters.But the process is hardly foolproof, and can be reversed by a future government.
Private-sector banks (like ICICI Bank) have also been hit by bad loans in problem sectors like infrastructure and metals. But they avoided the worst loan proposals that nationalized banks happily accepted, with disastrous results. The private banks lent on commercial principles, not political orders. Probably bank privatization alone can ensure commercial discipline in future. But no political party wants that.
19 July 1969
See graphic, ‘19 July 1969: the events of the day
Nationalised banks in 1969 and 2019. ’
Accounts, number of/ population covered
Bangladesh, China, India, Indonesia and Pakistan: the percentage of the adult population with bank/ mobile bank accounts. In 2011, 2014 and 2017 (Part-I)
Bangladesh, China, India, Indonesia and Pakistan: the percentage of the adult population with bank/ mobile bank accounts. In 2011, 2014 and 2017 (Part-II)
India has 2nd largest unbanked population
While India is quite proud about adding more individuals into the formal banking system -- the number of adults with bank accounts grew from 53% in 2014 to 80% in 2017 -- it is not enough. As many as 191 million Indian adults are still without a bank account. The figure places the country next only to China.
Bangladesh, China, India, Pakistan vis-à-vis the world/ 2017
Bangladesh, China, India, Pakistan vis-à-vis the world:
i) The number of unbanked adults, and
ii) The percentage of unbanked population,
As in 2017
State-wise contribution to banking business: 2018
The leading states’ contribution to the banking business in India, presumably as in 2018
2019, June- Goods and services with highest inflation
States with highest inflation, 2019
Additional Tier 1 (AT1) bonds
The basics, as in 2020 March
What are AT1 bonds?
Additional Tier 1 bonds, also called AT1in market parlance, are a kind of perpetual bonds without any expiry date that banks are allowed to issue to meet their longterm capital requirement. That’s why these bonds are treated as quasi-equity instruments under the law. RBI is the regulator for these bonds.
Do these bonds pay interest?
Yes. AT1 bonds are like any other bonds issued by banks and companies, which pay a fixed rate of interest at regular interval. Usually, these bonds pay a slightly higher rate of interest compared to similar, non-perpetual bonds. However, the issuing bank has no obligation to pay back the principal to investors.
Are these bonds traded in the market?
Yes. These bonds are listed and traded on the exchanges. So if an AT1 bond holder needs money, he can sell it in the market.
How are AT1 bonds redeemed?
Investors can not return these bonds to the issuing bank and get the money. This means there is no put option available to its holders. However, the issuing banks have the option to recall AT1 bonds issued by them (termed call option). They can go for a call option five years after these are issued and then every year at a pre-announced period. This way the issuing banks can give an exit option to AT1 bond holders.
At present, what’s the total value of AT1 bonds in the market?
According to a report by rating agency ICRA, nearly Rs 94,000 crore worth of AT1 bonds are currently issued by various banks. Of this, Rs 55,000 crore is from PSU banks, while the balance Rs 39,000 crore is by private lenders.
Administrative costs levied on customers
2015-18: Charges For ATM Withdrawals, low minimum Balance
Charged For ATM Withdrawals, Not Maintaining Min Balance
State-run banks have collected over Rs 10,000 crore from those who did not maintain minimum balance in their savings accounts and from charges levied on ATM withdrawals beyond the free transactions in the last nearly three and a half years, data submitted in Parliament showed.
According to a written reply to a Parliament question, the low monthly average balance was charged by SBI till 2012 but it stopped doing so till March 31, 2016 while other banks, including private banks, were charging as approved by their boards. SBI reintroduced the charge from April 1, 2017.
The minimum balance requirements were subsequently reduced from October 1, 2017. There is no minimum balance requirement for basic savings bank deposit accounts and Jan-Dhan accounts.
Apart from the over Rs 10,000 crore collected by staterun banks during the threeand-a-half-year period, private banks would also have collected a hefty amount. Data for private banks was not included in the numbers provided in the Parliament question.
The details emerged in a reply by the finance ministry to a question posed by Lok Sabha MP Dibyendu Adhikari on Tuesday. The ministry said the Reserve Bank of India (RBI) had permitted banks to fix charges on various services rendered by them, as approved by their boards. The banks are to ensure that the charges are reasonable and not out of line with the average cost of providing these services.
It also said, according to the RBI’s directions, a minimum of three free transactions at any other bank’s ATM at six metros — Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad — and a minimum of five free ATM transactions at a bank’s own ATM at any other location is permitted during a month.
“Beyond this minimum number of free ATM transactions, banks have their boardapproved policy on charges from customers on ATM transactions subject to a cap of Rs 20 per transaction,” the ministry said in its reply.
The ministry also said public sector banks had informed that they do not have any plans to shut down their ATMs. This was in response to the question on whether the government proposes to withdraw 50% of total ATM services in the country by March 2019.
Administrative measures, initiatives, issues
RBI’s asset quality review under Raghuram Rajan: 2015
The Times of India, June 19, 2016
A few years down the line several of the current bank chiefs would probably remember Raghuram Rajan for one thing eating into their annual bonuses. ICICI Bank has already announced that its top management won't receive performance bonus for 201516. PSU bank chiefs too are expected to miss the annual pay-out as soaring bad debts have hit the financial performance of lenders.
Just when data showed promise of the economy stabilising, the RBI started what's come to be known as asset quality review, a term that most bankers dread.While annual inspection of banks was the norm, RBI has now opted to ask banks to classify several loans as non-performing assets (NPA), which in normal course would have been treated as “standard“.
Classifying a loan as an NPA or a sub-standard asset means that banks have to set aside more funds to cover for potential losses due to nonpayment of dues. The result is for everyone to see: NPAs of Indian banks shot up to a little under Rs 6 lakh crore as each lender was handed a list of companies where funds had to be set aside, called provisioning in banking parlance. Even loans which were restructured were to be monitored strictly and funds set aside for a year.
As a result, against cumulative profits of close to Rs 31,000 crore in 2014-15, state-run lenders ran up losses of almost Rs 18,000 crore as bank after bank reported record losses. Some of the large private banks, such as ICICI Bank, man aged to stay profitable but saw a steep decline in profit.
But the hit is not just for banks, it also impacts India Inc. Companies that get the NPA tag would be choked of funding, a move that will impact economic revival as these entities would be unable to add more capacity to their factories.
Banks can't refuse faded, scribbled notes: RBI
The RBI has said banks cannot refuse to accept faded notes or those with scribbles. The central bank said such banknotes had to be treated as “soiled notes“ and dealt with according to the RBI's “clean note policy“.
The circular to banks was sent by the RBI after it received complaints that many branches were not accepting banknotes, specifically of 500 and 2,000 denominations, with anything written on them or those either smudged with colour or faded due to washing.
Bank branches have been rejecting such notes following rumours in social media that such notes were not acceptable.
The RBI drew attention to its December 2013 statement, issued in response to rumours that from 2017 onwards banks would not accept notes with anything written on them. The RBI had then stated that it had not issued any such instruction. The central bank clarified that its instructions on scribbling on notes was a directive for staffers not to write on banknotes. This was after the RBI had observed that bank officials themselves were in the habit of writing on banknotes, which went against the central bank's clean note policy.
The RBI has sought cooperation from all members of public, institutions and others in keeping banknotes clean by not scribbling on them.
Bank Board Bureau/ 2016
The Hindu, February 29, 2016
Prime Minister Narendra Modi approved the setting up of the Bank Board Bureau with former Comptroller and Auditor-General of India Vinod Rai as its first Chairman.
The Bureau is mandated to play a critical role in reforming the troubled public sector banks by recommending appointments to leadership positions and boards in those banks and advise them on ways to raise funds and how to go ahead with mergers and acquisitions.
“With a view to improve the governance of public sector banks, the government had decided to set up an autonomous Bank Board Bureau. The bureau will recommend for selection the heads of public sector banks and financial institutions and help banks in developing strategies and capital raising plans,” the government said in a release.
The bureau was announced in August 2015 as part of the seven-point Indradhanush plan to revamp these banks. It will constantly engage with the boards of all 22 public sector banks to formulate appropriate strategies for their growth and development.
The bureau, led by Mr Rai, will select the heads of public sector banks (even from the private sector, if need be) and aid them in formulating strategies to raise additional capital. It will select and appoint non-executive chairmen and non-official directors.
The non-performing assets of public sector banks are estimated at almost Rs. 4 lakh crore, and they need to raise capital of Rs. 2.4 lakh crore by 2018 to conform to Basel-III capital requirement norms, according to the government.
While some questions have been raised on Mr. Rai's appointment as a CAG cannot hold a government office post-retirement, former senior civil servants say the role is advisory in nature and a part-time position. The government release said the appointments have been made for a period of two years.
The bureau will have three ex-officio members and three expert members, in addition to the Chairman.
2016/ Selection process of Managing Directors of public-sector banks
The Indian Express, May 30, 2016
The Bank Board Bureau (BBB), set up by the government in February 2016, has kicked off the selection process of managing directors and CEOs of public sector banks.
The body has conducted its maiden interviews for appointments of MDs & CEOs at three state-run banks and met as many 10 candidates who are currently serving as executive directors in various PSU banks, according to sources. One of the interviewees was earlier shunted out by the government from a large PSU bank in connection with a dubious loan to Atlas group, a Gulf-based jewellery chain.
2018/ Asset Quality Review
The RBI has included several top business groups in the ongoing asset quality review which, based on the replies of the banks, could lead to bankruptcy proceedings in many cases.
The regulator has already sent letters to banks to gauge the level of action by lenders to clean up the banking system, said a banking source. Each bank is expected to clarify the position separately. “This could be the second major asset quality review after former RBI Governor Raghuram Rajan kicked off the first review in 2015,” said an official of a nationalised bank.
The RBI has included several top business groups in the ongoing asset quality review which, based on the replies of the banks, could lead to bankruptcy proceedings in many cases. Most of these accounts have already been declared as non-performing assets (NPAs) by banks. The RBI did not respond to emailed queries.
The RBI had initially sent a list of 12 defaulters for resolution under the Insolvency and Bankruptcy Code (IBC). Out of this, 11 accounts are in various stages of resolution at different benches of the National Company Law Tribunal (NCLT). Bankers are expecting over 50 per cent recovery from these accounts.
The regulator subsequently sent another list of 28 stressed accounts for resolution. However, banks don’t expect more than 25-30 per cent from these accounts. Some of these accounts were evergreened — or fresh loans disbursed to repay old loans — by banks to prevent them being classified as bad loans. The fresh exercise by the RBI comes at a time when gross non-performing assets in the banking system has risen to around Rs 10.3 lakh crore, or 11.2 per cent of advances compared with Rs 8 lakh crore, or 9.5 per cent of advances, as on March 31, 2017.
In FY18, the banking system reported a net loss of Rs 40,000 crore because of the sharp rise in NPAs and the resulting increase in provisioning costs. In the previous fiscal, as much as Rs 5 lakh crore of bank loans slipped into the NPAs category, taking the total slippages in the past three fiscals to Rs 13.6 lakh crore, Crisil has said.
In June, the RBI’s Financial Stability Report (FSR) warned that “the stress in the banking sector continues as gross NPA ratio rises further. Profitability of banks declined, partly reflecting increased provisioning”. RBI’s macro-stress tests indicated that under the baseline scenario of current macroeconomic outlook, gross NPA ratio of banks may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019.
Nearly a dozen PSU banks are under the prompt corrective action (PCA) of the RBI.
2019: RBI removes BOI, BOM, OBC from PCA framework
Bank of India, Bank of Maharashtra, OBC Exit PCA Framework
The Reserve Bank of India (RBI) has removed Bank of India, Bank of Maharashtra and Oriental Bank of Commerce from its prompt corrective action (PCA) framework — a watch list for weak banks that placed lending restrictions on them.
“The RBI’s decision to remove the three banks from the PCA framework is on expected lines, given the sizeable capital infusion in these three during December 2018,” said Anil Gupta, sector head (financial sector ratings) at Icra. “The balance of the budgeted capital can support the exit of one or two more banks from the PCA framework if the government allocates higher capital to some of these lenders, like Corporation Bank,” he added.
Responding to the RBI action, BoM MD & CEO A S Rajeev said that the recent capital infusion of Rs 4,498 crore helped the bank improve its capital adequacy ratio to 11.05%. At the same time, the bank reduced its non-performing assets (NPAs) by 50% year-on-year.
The decision is understood to have been taken following a meeting of the board for financial supervision on Thursday. The board, chaired by governor Shaktikanta Das, reviewed the performance of all the 11 banks on the PCA list.
According to Gupta, although the three banks have exited PCA, the question remains whether negative return on asset continues to remain a PCA criteria? Following the RBI announcement, finance secretary Rajeev Kumar said in a tweet that this was an outcome of the government’s ‘4R’ strategy — recognition of stressed loans as default, recapitalisation of banks, resolution of bad loans, and reform of public sector. “Banks need to be more responsible, adopt high underwriting and risk management standards to avoid recurrence,” Kumar added.
The RBI’s move comes two days after a review meeting of banks with interim finance minister Piyush Goyal. In the meeting, Goyal informed banks that if they maintained the trend of improvement in performance, they would exit the PCA soon.
2018/ Inter-Creditor Agreement
The Reserve Bank of India has started a review of over 200 stressed assets of top business groups in the banking system to assess the provisioning level and classification of assets.
Over the past few years, Indian banks have been forced by the Reserve Bank of India to recognise troubled assets on their books, but their resolution has remained a challenge. • Public sector, private sector and foreign banks signed an inter-creditor agreement to push for the speedy resolution of non-performing loans on their balance sheets.
• It is aimed at the resolution of loan accounts with a size of Rs 50 crore and above that are under the control of a group of lenders.
• It is a part of "Sashakt" plan approved by the government to address the problem of resolving bad loans.
As many as 56 lenders signed an inter-creditor agreement which will prohibit dissenting creditors from making an easy exit.
The agreement — based on a recommendation by the Sunil Mehta committee that looked into resolution of stressed assets — aims to deal with bad loans that banks must resolve before next month end under a February 12 RBI circular. Banks will have to refer unresolved loans to the bankruptcy court and they fear the asset value may erode if there are no buyers at bankruptcy court.
The agreement says if 66 per cent of lenders by value agree to a resolution plan, it would be binding on all lenders. The dissenting creditors will, however, have the option to sell their loans to other lenders at a discount of 15 per cent to the liquidation value, or buy the entire portfolio paying 125 per cent of the value agreed under the debt resolution plan by other lenders.
The agreement says each resolution plan would be submitted to an overseeing committee comprising experts from the banking industry. For dissenting creditors, the agreement says the “lead bank has the right, but not the obligation, to arrange the buyout of the loan facilities at a value that is equal to 85 per cent of the liquidation or the resolution value —whichever is lower.”
However, “if the lead bank does not arrange for a buyout, the dissenting lenders shall have the right, but not the obligation, to arrange for buyout of the facilities of all the other lenders at a value that is equal to 125 per cent of the liquidation value or the resolution value — whichever is higher.”
Dissenting creditors can also exit by selling their loans to any entity at a price mutually arrived at between the lender and buyer. The agreement has a standstill clause wherein all lenders are barred from enforcing any legal action against the borrower for recovery of dues. During the standstill period, lenders are barred from transferring or assigning their loans to anyone except a bank or finance company. But it is not clear if a loan can be sold to an asset reconstruction company during that period.
The standstill provision will be operative for 180 days from the reference date — the RBI had asked lenders to resolve their restructured loans within 180 days beginning March 1 or refer those to the bankruptcy court. However, the provision would not prevent lenders from acting against borrowers or directors for criminal offence. Lenders are in the process of getting this inter-creditor agreement approved by their boards.
• Such an agreement may persuade banks to embark more quickly on a resolution plan for stressed assets.
• It is an improvement over the earlier model, which replied solely on the joint lenders' forum to arrive at a consensus among creditors. It is, in fact, logical for joint lenders who want to avoid a deadlock to agree on the ground rules of debt resolution prior to lending to any borrower. But the obligation on the lead lender to come up with a time-bound resolution plan can have unintended consequences.
• The biggest obstacle to bad loan resolution is the absence of buyers who can purchase stressed assets from banks, and the unwillingness of banks to sell their loans at a deep discount to their face value. Unless the government can solve this problem, the bad loan problem is likely to remain unresolved for some time to come.
2019: RBI’s guidelines
PSBs can’t push people of choice on their boards
Public sector banks (PSBs) will not be able to manoeuvre people of their choice into board positions with the Reserve Bank of India (RBI) tightening fit and proper guidelines for the position of elected directors. The central bank on Friday came out with new master directions on fit and proper guidelines for elected directors on the board of PSBs. Elected representatives such as members of Parliament, or state legislature or municipal corporation or local bodies cannot be shareholder representatives on bank boards.
The rules explicitly bar board members of the RBI or any bank, financial institution, insurance company or bank holding company. The new rule also requires that the candidate should not have served on the board of a bank, financial institution or insurance company for six years. Individuals who are connected with hire purchasing, financing, money lending, investment, leasing or para banking activity are also not considered eligible, as also are stock brokers.
Shareholders of PSU banks are required to elect two to three directors, depending on the level of public shareholding. Although there are directors by investors, these board members have typically been chartered accountants or other professionals with business contacts with the banks.
To keep out political appointees, RBI requires all PSBs to have a nomination and remuneration committee (NRC) with at least three non-executive directors. Of these, half should be independent and should include at least one member from the risk management committee of the board to determine the ‘fit and proper’ status of candidates for the board.
See graphic :
Alternative lending deals, 2014-17
i) India overtakes China
ii) India just behind US
Women borrowers/ 2021
NEW DELHI: Women are proving to be better borrowers since they display higher credit consciousness and better credit scores as compared to their male counterparts, a study by TransUnion CIBIL revealed. As of 2021, 53% of the 54 million women borrowers had a CIBIL score in the prime category (with credit scores of 731-770) and above compared to 47% for men.
The delinquency rate for women borrowers was pegged at 5.2% across retail credit products, compared to 6.9% for their male counterparts.
Besides, the report pointed out that women borrowers were increasing at a faster pace in recent years — 29% annually. They accounted for 29% of the borrowers, compared with a quarter of the borrowers in 2016.
The outstanding loan amount also increased at 20% compounded annually (CAGR) to Rs 12.4 lakh crore which is 23% of total outstanding retail credit balances in 2021 from Rs 5 lakh crore or 21% in 2016.
Banks see women as a huge target segment as credit penetration, despite doubling to 12% between 2016 and 2021, remained low.
The report also said that the growth in women borrowers has remained strong during the pandemic, with women borrowers showing a stronger growth at 11% compared to the 6% of male borrowers through 2021. TransUnion CIBIL insights also indicated the expansion in the footprint of women borrowers in the semi-urban and rural locations, with a CAGR of 21% between 2016 and 2021 as compared to 16% growth in metro and urban regions.
Private vis-à-vis PSU banks: Rural Branches/ 2011-21
The turnover of the CEOs of selected public-sector and private banks, presumably as in 2008-18
PSU banks have a higher turnover of CEOs compared to their private sector peers. In the last decade, five PSU banks have had six CEOs, meaning that the average tenure has been less than two years. Analysts say such quick changes impact governance and the ability of a bank to take strategic long-term initiatives. Bank chiefs are also unwilling to take decisions on tricky issues and are happy to kick the can down the road.
SBI chief Arundhati Bhattacharya took home Rs 28.96 lakh in 2015-16.
In comparision, ICICI CEO Chanda Kochhar received a basic salary of Rs 2.66 crore in 2015-16.
Such high disparity in compensation impacts the motivation of public sector managers who have to fiercely compete with private sector peers.
SBI, one of the world's 50 largest banks, pays only a small fraction to its top management as compared to private sector players like ICICI Bank and HDFC Bank.
Former RBI governor Raghuram Rajan had flagged the low remuneration issue last August saying it makes difficult for state-owned banks to "attract top talent, especially a lateral entry".
SBI chairman Arundhati Bhattacharya took home Rs 28.96 lakh last fiscal, which is pittance when compared to remuneration of her counterparts in private banks receive, according to analysis of annual reports of various banks.
In comparison, ICICI Bank MD and CEO Chanda Kochhar received a basic salary of Rs 2.66 crore last fiscal besides Rs 2.2 crore performance bonus to be paid over the next few years. In addition, she received allowances and perquisites of over Rs 2.43 crore.
The total compensation received by Kochhar in FY17 stood at Rs 6.09 crore.
Similarly, Shikha Sharma, MD and CEO of Axis Bank, took home a basic salary of Rs 2.7 crore, and Rs 1.35 crore as variable pay, besides host of perks and allowances like Rs 90 lakh HRA.
Yes Bank MD and CEO Rana Kapoor, who also happens to be promoter of the bank, took home Rs 6.8 crore as salary in 2016-17.
HDFC Bank's managing director Aditya Puri saw his remuneration rise marginally to Rs 10 crore and exercised stock options worth over Rs 57 crore during the last fiscal.
Speaking about public sector banks at a banking conference in Mumbai, Rajan had said state-owned banks tended to overpay at the bottom but underpay their top executives.
He jokingly said he himself was underpaid and the disparity made it harder to attract talent from outside at the top level in public sector banks.
On the business front, SBI, after merger with its subsidiary banks, caters to 42.04 crore customers with a market share of 23.07 per cent and 21.16 per cent in deposits and advances, as opposed to 18.05 per cent and 17.02 per cent respectively, before the merger.
Punjab National Bank, the nearest rival of SBI among PSBs post merger, will have a market share of 5.96 per cent, and 7.04 per cent in deposits and advances.
Remuneration comprises various components, including basic salary, allowances and perquisite, PF, superannuation allowances, gratuity and performance bonus and payment of performance bonus is deferred over a multi-year period.
Not only such high disparity in compensation makes it difficult for the government to hire top managers laterally at public sector banks, as pointed out by Rajan, it also impacts the motivation of public sector managers who have to fiercely compete with their private sector peers.
HDFC Bank CEO Aditya Puri, who has been the highest-paid Indian banker for years, has seen a small dip in overall remuneration to Rs 9.6 crore in FY18 from Rs 10 crore in FY17 despite the bank’s net profit rising 20% to Rs 17,487 crore.
The compensation could change if the central bank approves a higher performance bonus. According to information in the bank’s annual report, bonus for FY17 has not been paid out as it is pending RBI approval and therefore not disclosed. In FY17, he had received a performance bonus of Rs 92 lakh.
The ratio of Puri’s salary to that the median is 209:1. However, his salary has not increased in line with the 8.9% average percentage increase for key managerial personnel and non-managerial staff. Puri holds around 0.13% stake in the bank, which is worth about Rs 687 crore. Puri, who has led the bank for 24 years, is credited with creating the country’s most valuable financial institution, which is today worth nearly Rs 5.3 lakh crore.
Uday Kotak, founder and CEO of Kotak Bank, received compensation of Rs 2.92 crore in FY 18 (Rs 2.63cr last year), which is 48.44 times the median salary in the bank. However, despite the relatively modest salary, Kotak ranks 104 in the Bloomberg Billionaire Index with assets worth nearly Rs 76,000 crore because of his 29.75% holding in the bank.
Yes Bank CEO Rana Kapoor’s total remuneration for FY18 stood at Rs 5.35 crore compared to Rs 6.81 crore in FY17. This was despite the bank’s net profit rising nearly 27% to Rs 4,224 crore in FY18. His salary is 79 times the median salary in the bank. Kapoor’s individual shareholding in the bank is worth Rs 3,306 crore.
Shikha Sharma, MD & CEO of Axis Bank, has seen her salary dip marginally to Rs 2.90 crore from Rs 2.94 crore in the previous year. This does not include other perks such as HRA, deferred variable pay and company contribution to provident fund. Her remuneration is 77.6 times the median.
ICICI Bank is yet to publish its annual report for FY18. The bank’s CEO Chanda Kochhar received total remuneration of 5.54 crore in FY17 which was 112 times the median. As compared to the private sector, public sector bank chiefs receive modest salaries. For instance, the chairman of SBI, the country’s largest bank, received compensation of Rs 14.25 lakh for the second-half of FY18 after he took charge mid-year. However, analysts point out that public sector banks have a higher wage to income ratio because of higher entry level salaries and also because private sector banks score higher in terms of productivity.
2019: 50% of CEOs’ pay to be variable: RBI
50% of bank CEOs’ pay to be variable: RBI
TIMES NEWS NETWORK
Top executives in banks will have to receive half their salary in the form of variable pay which will be linked to their bank’s performance, according to new rules announced by the RBI on Monday. The variable pay itself will be capped at 300% of the fixed pay and will include equity compensation.
The inclusion of equity in variable pay and the cap on variable pay would mean that bonuses will be limited, and will include non-cash compensation.
The new guidelines announced by the central bank will be effective from April 1, 2020. These guidelines apply to private sector banks, local area banks, small finance banks and payment banks. They will also apply to multinational banks that have incorporated locally as wholly owned subsidiaries.
Besides chief executives, the restriction on salaries will apply to senior executives, including whole-time directors, and other employees who are risk-takers such as bond traders. RBI has said that if bonuses are paid in cash, at least half of the cash bonus should be deferred if the total amount is over Rs 25 lakh.
If the variable pay is up to 200% of the fixed pay, at least 50% of it must be non-cash, and if the variable pay is above 200%, 67% of it should be paid via non-cash instruments.
In addition to deferring the bonuses, RBI has asked banks to have ‘clawback’ clauses which enable them to recover past bonuses if the executive’s actions result in losses for the bank. The policies determining compensation will have to be laid out by the board of each bank. “The policy should cover all aspects of the compensation structure such as fixed pay, perquisites, performance bonus, guaranteed bonus (joining/sign-on bonus), severance package, share-linked instruments such as employee stock option plan (ESOPs), pension plan and gratuity taking into account these guidelines,” said RBI.
“Banks shall identify a representative set of situations in their compensation policies, which require them to invoke the clawback clauses that may be applicable on entire variable pay,” RBI said.
“The compensation practices were one of the important factors which contributed to the global financial crisis in 2008. Employees were often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations,” RBI said in its note to banks announcing the new rules.
According to RBI, it was these perverse incentives that amplified excessive risk-taking that severely threatened the global financial system. “The compensation issue has, therefore, been at the centre stage of regulatory reforms,” RBI said.
What bank CEOs earned in 2019
2016-18: PSBs lose ground
Nationalised banks are losing market share to private banks not just in deposits and credit, they are also rapidly losing their position as lead bank — the lender which calls the shots in lending to businesses — in many corporate relationships. While most corporates have multiple banking relationships, they can have only one bank which sets the terms and conditions for credit facilities.
According to report by Greenwich associates, HDFC Bank and SBI top the list as lead bankers for corporates. Each of these two banks is used for corporate banking services by roughly three-quarters (75%) 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 Bank in first place and ICICI and SBI tied in the No. 2 spot.
The report said that weak balance sheets and other immediate challenges like bad loans are preventing PSU banks from making long-term IT investments, which are needed to compete for wholesale banking business in the future. This comes at a time when needs of businesses are getting more complex and they are looking for value-added services. The loss of lead bank status has implications for retail businesses as well as many private banks offer attractive ‘salary account’ schemes for corporates where they are lead banks.
Among foreign banks, Standard Chartered Bank and Citibank are tied 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, StanChart second and Citi a close third.
The nationalised banks (PSBs excluding SBI) have been losing marketshare because almost half of them were placed under prompt corrective action (PCA) by the RBI last year.
Corruption/ vigilance cases
The CBI and ED are investigating cases against half-a-dozen managing directors and CEOs of commercial banks, although no arrests have been made so far, the government informed Parliament.
Separately, the CBI has sought prosecution of over 800 PSB staff, including presidential appointees such as chairmen, MDs and executive directors of state-run entities since 2017. In 139 cases, the government had declined request for prosecution, the finance ministry said in LS.
The ministry, however, was silent on whether the probe involved serving or former top bankers. Apart from former ICICI Bank CEO and MD Chanda Kochhar, ex-PNB chief Usha Ananthasubramanian, United Bank’s former CMD Archana Bhargava and ex-UCO Bank boss Arun Kaul are among those facing investigation. An inquiry need not translate into prosecution.
“Through extensive reforms, change in credit culture has been instituted and controls have been tightened for every stakeholder in the financial system, which has enabled a tighter check on corruption and decline in occurrence of frauds,” the government said in the House.
2019/ India lags most countries in reducing use
India lags most countries in reducing cheque use
India lags other countries in the shift to a more efficient electronic payment system from a costly cheque clearance. One reason for this is that a relatively lower number of people use the direct debit option to make recurrent payments and instead issue cheques every month. A report by the RBI, which compares the country’s advancement in payment systems with others on various parameters, has identified several areas where India is in a weak spot. This includes per capita number of card swipe machines, the availability of a common card for transportation, share of debit and credit cards in payment systems. Despite having a high level of cash, the ATM penetration in India is still lower than in other countries.
One area where the country has made progress is reducing dependency on cash. India had a high cash in circulation at 12% of gross domestic product (GDP) with only Japan and Hong Kong being higher. Demonetisation and an active growth in GDP brought down the active cash in circulation as a percentage of GDP to 8.7% in 2016 which increased to 10.7% in 2017.
The report said that in most countries cheques have disappeared or are dying a slow death. India’s cheque volume declined by 10.8% between 2012 and 2017 at a compounded annual growth rate of -2% — the second slowest after Turkey. The US and Brazil, which had a higher volume of cheques in 2012, showed a sharper decline. “In India, the year-on-year growth in 2016 was 10%, which can be attributed to demonetisation where all modes of payment showed an increase. However, 2017 saw a small decline of 2.9% over the previous year,” the RBI said.
Ironically, India’s failure to move people away from cheques is also attributed to its success in cheque handling. India has an efficient T+1 settlement system (cheques are cleared in a day) and cheques processing is mechanised. Standardisation of cheque forms and cheque truncation system (CTS) enable the clearing to be done using an image of the cheque rather than moving it physically. On the positive side, India is ahead of others in payment laws, regulation, customer safety and authentication standards.
1. State-wise deposit and credit of scheduled commercial banks, 2016-17-I
2. State-wise deposit and credit of scheduled commercial banks, 2016-17-II
ARE BIHAR’S DEPOSITS FUNDING TAMIL NADU’S GROWTH?
Banks help convert people’s savings into investment, which in turn creates employment, income and assets. The process of conversion is called credit creation in which banks lend money to businessmen, farmers and consumers who need loans and are creditworthy. States with higher credit demand and more creditworthy people convert higher share of deposits into credit and have a high credit-deposit ratio. States with low credit-deposit ratios are those whose income, savings or both are higher than their investment needs — mostly the poor ones. India’s average credit-deposit ratio is 73.6
Credit has to expand 18-20% for India to become $5tn eco
Required Growth Rate Was Last Achieved In Fiscal 2010-11
TIMES NEWS NETWORK
annual credit growth in the range of 18-20%. This kind of growth was last seen following the stimulus in FY11, when bank credit grew 21.5%.
In the case of new-to-credit borrowers, 59% of disbursement in these sectors came from NBFCs.
bankers say that there isn’t much of private investment demand and most of the credit demand is from retail and government investment in infrastructure.
According to Amitabh Chaudhry, MD & CEO of Axis Bank, all the high-frequency indicators point to things being tough. “Sales are down and working capital cycles are getting longer and bankers have to be cautious,” he said. The opportunities were largely among businesses that have managed to deleverage, he added.
In the last decade, credit growth ranged from a low of 8.2% in FY17 to 21.5% in FY11. The highest growth in bank credit after liberalisation was 37% in FY06. As on August 2, 2019, the year-on-year bank credit growth was 12%, while the year-to-date credit growth was negative.
Growth of bank credit fell to a multi-decade low of 5.1% for the fortnight ended December 23, as drying up of demand in the last two months of the year saw businesses cutting down on borrowing. Data released by RBI showed that as of December 23, bank lending to busines ses, individuals and the farm sector stood at Rs 73.48 lakh crore, an increase of 5.1% over the same period of last year.Going by readily available RBI data, this is the slowest rate of growth since 2000.
SBI chief economist Soumya Kanti Ghosh went further to say that credit growth was actually the lowest in over 60 years -since 1954-55 -when it had slowed to 1.7%. A slowdown to 5.1% in De cember seems to indi cate that credit growth is reaching a point of no return in this financial year.While there is marginal growth year-on-year, on a yearto-date basis (from April 2016) credit has declined in many sectors,“ said SBI chief economist Soumya Kanti Ghosh.Year-on-year credit growth in the previous fortnight ended December 9 was also a low 5.76%.
D K Joshi, chief economist at Crisil, the country's leading credit rating agency , attributed the drop in credit growth to the disruption caused by demonetisation. “Otherwise there was no reason for credit growth to fall. The economy was looking up, there was the pay commission hike, there were good rains, and some interest rate cuts were being passed on to borrowers, which would have created more demand for credit,“ he said.
The second half of the year is when banks advance the bulk of their loans. A slow down at this time will hurt growth targets, said economists. “Demonetisation has hurt activity across all corners of the economy . Purchasing Managers Index (PMI) data shows that both manufacturing and services have contracted in December. The PMI order-to-inventory ratio suggests that upcoming manufacturing activity will also remain weak. Input prices have been rising, but have not yet been passed on to final prices, suggesting that corporate margins have worsened,“ said Pranjul Bhandari, chief economist, HSBC India in a report.
According to Jefferies In dia, an investment bank, credit growth could slip to 6% in FY17. “Deleveraging of corporate balance sheets, halt in fresh capex, and increased access to corporate bond market have led to a negative growth in banks' credit to corporates.Given that 56% of bank loans and 88% of non-performing assets are with large borrowers, they hold the key to bank credit growth pick-up and asset quality improvement,“ the research firm said in a report.
RBI numbers show that corporate loans are shrinking.Since end-September bank loans have shrunk by Rs 1.72 lakh crore (2.3%). The sectors which saw a slowdown or drop in credit include infrastructure, food processing, chemical and chemical products, all engineering, textiles and basic metal and metal products.
Although very little fresh investment was taking place even before demonetisation, there was a consumption push. Crisil's Joshi expects consumption-led growth to return because of “some of the measures likely in the Budget, lower interest rates and if we have good rains. The next fiscal year will see a pick-up. But it will not happen in the January-March quarter.“
The silver lining appears to be the gains to the government from demonetisation.“We continue to expect the Income Disclosure Scheme II to net around Rs 1 lakh crore of tax. At the same time, we have cut our estimate of RBI dividend from black cash money not returned to banks to Rs 50,000 crore from Rs 95,000 crore earlier with the bulk (of demonetized currencies) depositedexchanged,“ said Bank of America Merrill Lynch in a report.
Credit and deposit growth in India, 2000-2020.
Share of credit growth, 2012-18
2017>2018: Consumer loan growth exceeds overall credit
Unsecured Loans Grow Twice As Fast As Total Borrowing
Unsecured personal loans, which are availed for consumption, have emerged the fastest growing segment in bank lending.
According to borrower data analysed by TransUnion CIBIL, loans outstanding under credit cards, personal and consumer durable loans grew
31.3% year-on-year as on December 2018. This is more than double the 15% year-on-year growth recorded by overall bank credit.
The TU CIBIL Industry Insights Report (IIR) shows consumer credit market continued to expand over the past year thanks to strong growth in these unsecured segments. As against this the secured lending category — loans against property (LAP), auto and housing — experienced more moderate total balance growth. But even these segments grew at a robust rate of 21.8%, 17.4% and 17.1%, respectively.
Also, while default rates remained relatively stable across most major consumer lending categories, loans against property have seen a 53-basis point rise in serious delinquencies. Auto loans have been an exception with serious delinquency rates dropping 116 basis points to 2.8%. Serious delinquency rates are measured as the percentage of loans that are overdue for 90 or more days.
“Consumer credit continues to be a key driver for the Indian economy. Although GDP growth has decelerated in recent quarters, the rate of overall consumer lending growth in India is still significantly higher than for most other major economies in the world,” said Yogendra Singh, vice-president of data science and analytics for TransUnion CIBIL. One reason for the sharp growth in this unsecured segment is the improved ability of lenders to provide loans for the non-salaried new-to-credit segment by using fresh data sources and analytical tools.
2015-18, Jan: high growth, though from low base (in 2018)
Bank credit growth rate (%), 2015- 2018, Jan
Outstanding bank credit has touched Rs 82.06 lakh crore, recording a yearon-year growth of 11.1% — the highest since February 2016. Bankers attribute the surge to a lower base following absence of credit offtake during demonetisation coupled with incipient recovery in demand for loans.
For the same period, nonfood credit growth has touched almost 12% — the highest since April 2015 — partly due to an increase in demonetisation. Non-food credit represents bank loans other than those advanced to Food Corporation of India for grain procurement.
Data released by the Reserve Bank of India showed that outstanding non-food bank credit stood at Rs 81.5 lakh crore, an increase of 11.96% over the last 12 months.
Compared to this, outstanding bank deposits of Rs 109.97 crore were up only 4.5% over the same period last year. The deposit growth rate was, however, higher than the preceding three fortnights.
According to SBI chief economist Soumya Kanti Ghosh, there are signs of a pickup in the economy.
“The latest IIP (index of industrial production) numbers confirm that few of the manufacturing sectors are pushing growth rate up. These are sugar, cement, steel, commercial vehicles, passenger vehicles and two-wheelers. Numbers suggest that some sectors are actually showing green shoots,” Ghosh pointed out.
“While some element of the base effect may be there, I believe that there is traction in terms of growth momentum. For instance, the SBI composite index shows that industrial production for December 2017 is also likely to come out strong,” said Ghosh.
Some bankers say that the surge in yields in end-December could have resulted in some corporates shifting to the loan market from money market instruments. In 2017, a large chunk of funding came from money market instruments like commercial paper and short-term bonds. The rise in bond yields is seen as a pointer to hardening interest rates.
Ghosh, however, rules out a rate hike by the central bank. “I don’t think that rate hike is an overarching feature. Economic growth is at an incipient stage and inflation is still under control,” he said.
2016-17: Lowest growth since 1953
Hit By Bad Loans, Sluggish Corporate Investments, DeMon
Growth in bank credit in FY17, at 5.1%, has turned out to be the slowest in over 60 years as state-owned banks burdened with bad loans struggled to find safe avenues to lend. The last time loans grew slower than this was in 1953-54 when bank credit growth had slowed down to 1.7%.
According to data released by the RBI, outstanding bank credit as on March 31, 2017 stood at Rs 78.82 lakh crore. A large part of the growth in lending has come in the last fortnight of the month when banks disbursed Rs 3.16 lakh crore. But even after this last-minute surge, loan growth for the whole year was 5.1% as against 10.3% last year.
Other than bad loans and corporate investment coming to a standstill, bank credit growth was also constrained by demonetisation. Between October and December 2016, bank credit contracted by 2.3% as against a 2.7% growth during the same period last year.
Besides bad loans, one of the biggest concerns for the RBI is managing the surplus liquidity with banks. While on the one hand banks are seeing lower credit growth, on the other their deposits continue to remain high, again thanks to demonetisation.
Banks have ended the year with an 11.8% growth in deposits, which now stand at more than Rs 108 lakh crore. Some bankers feel that the RBI is reluctant to intervene in the forex market as this would add to the surplus liquidity in the system.
According to a senior banker, of the total credit growth during the current fiscal, half has come from home loans and alarge part of the rest has been due to loans to the service sector. Most of the lenders are private banks and a few large private banks. Other than them, most public sector banks are likely to report flat credit growth for FY17.
One fallout of the slow down in credit is that banks will report a higher percentage of bad loans. Growth in credit helps to mask the level of bad loans. With bad loans at close to 10% of their total assets, many banks face a catch-22 situation. The RBI's prompt corrective action may make it difficult for banks to expand their balance sheet.The absence of fresh lending would, however, make it difficult for banks to generate revenues to clean up their books.
“With asset quality pressures, banks -especially the weaker public sector banks (PSBs) -have been reporting a continuous degrowth in their net interest income (NII) over the five consecutive quarters of Q3FY2016 to Q3FY2017, mainly on account of slower credit growth and reversal of interest income recognised on NPAs“ ratings agency ICRA said in a report.
Credit growth, sector-wise: 2016-17
Grow 16% Over Five Years As Loans To Corp Slow To 6.7%
Over the last five years home loans have recorded the highest compounded annual growth rate (CAGR) of over 16% and now account for over 12% of all bank credit.Overall credit to industry during the same period has slowed to single digits at 6.7% after a negative growth this year.Though the share of loans to industry in March 2017 were still hight at 37.5%.
According to data on sector credit released by the RBI, bank credit to industry as on March 31, 2017 stood at Rs 26.77 lakh crore which is 2% lower than outstanding bank credit of Rs 27.30 lakh crore as on end-March 2016. This has resulted in the slowest growth in bank credit in decades.
The main driver of bank credit in 2016-17 has been home loans which stood at Rs 8.60 lakh crore, 15% higher than Rs 7.46 lakh crore as on endMarch 2016. The share of housing which was 9.26% on March 2012 has been rising over the years. The last time bank credit to housing was in double digits was in 2009, when the government introduced special schemes to boost demand in the wake of the global financial crisis. “Between FY12-FY16 bank credit registered double digit growth, barring in FY15 when credit grew by 9%. However, growth in bank credit slowed to 5% in FY17. The slowdown has mainly been on account of banks stressed with bad loans, stagnant corporate investment environment and some migra tion to the debt market,“ said Madan Sabnavis, chief economist, CARE Ratings.
The slowdown in lending to industry is largely because of PSBs which have reduced their exposure to corporates.After home loans, credit card outstandings are the fastest growing segment which have grown at a CAGR of 20% over the last five years. However, they account for less than 1% of bank credit and are one of the smallest components of lending to the personal segment -smaller than education and auto loans.
December 22, 2017: Bank credit growth in double digits
Bank credit has grown in double digits for the first time since September 2016 driven by home loans and advances to traders and finance companies.
According to RBI data, the loan book of the banking sector stood at Rs 80,967 crore as on December 22, 2017 — an increase of 10.7% from the same period a year ago. The last time bank credit was above 10% was on September 30, 2016 when year-on-year advances grew 11.83%. A month later the government announced demonetisation which led to a prolonged slump in credit growth. For the whole of 2017, bank credit growth was only in single digits.
On the commercial end, Banks have been lending to trade and to non-banking finance companies. Besides shrinking demand for credit, demonetisation also brought down interest rates sharply. This resulted in large corporates replacing loans with borrowings by issuing debt. While lenders do invest in debt, these investments are not reflected in credit numbers. Besides banks, mutual funds have also invested a significant amount in corporate bonds.
The growth in the loan book of banks during the current fiscal (up to December 22) has been Rs 2,55,260 crore. In the same period last year, it was Rs 67,780 crore. Overall bank credit stood at Rs 80,967 crore as on December 22.
A break-up of the sectoral deployment of bank credit up to November-end shows that 40% of the incremental loans went to services sector, which included loans to trade and non-banking finance companies. Almost half (47%) of the incremental bank loans went to the personal segment. Loans to the housing segment grew at 13.1% with the homeloan books of banks growing by Rs 10,680 lakh crore to Rs 9,22,210 crore. The highest growth was recorded by credit card advances which rose 37% to Rs 63,700 crore.
Although bank credit to industry accounts for 36% of the total loan book, it is only 4.5% of the incremental credit. Overall credit to industry has grown by only 1%.
According to rating agency CARE, bank credit has grown faster this year leading to a strain on liquidity. “Credit growth to manufacturing and services for April-October are negative, while that to agriculture and personal loans segment is 7.7%. For the year, we expect growth in credit to match that of deposits, with thrust being on retail sector,” the rating agency said in a report.
Growth in aggregate bank deposits has slowed to 4% mainly due to the impact of demonetisation wearing off. With currency supply, improving most of these funds were withdrawn resulting in a drop in deposits growth. As on December 22, bank deposits stood at Rs 1,08,851 crore a decline of Rs 16,960 crore over the fortnight.
2017-18: individuals, not industry, drove growth
Ailing IDBI Bank is looking to step up focus on housing, retail, farm and MSME loans and pare the size of its corporate loan book, with the management planning to raise Rs 5,000 crore through the sale of non-core assets as part of a revamped five-year strategy to be finalised by the state-run lender’s board.
The plan hinges on specialised branches and digital transactions — targeted to account for 80-85% share (of all transactions) over the next five years — with the management banking on the rapidly-depleting manpower to deliver results, sources told TOI. In recent months, large number of employees have left the bank due to uncertainty and no salary revision for several years. The new strategy has been prepared by Boston Consulting Group, which may get a fresh lease of life through a one-year extension in its contract that is estimated to cost over Rs 15 crore.
Since shedding its development financial institution tag nearly 15 years ago, IDBI has been a story of misses with several twists and turns and repeated failures to significantly scale up retail banking, a business that has moved from the public sector to private banks, which are seen as more efficient in delivering services. The retail loan book made up for 23% of the lender’s advances at the end of December, while the loans to industry accounted for nearly half the global loans of over Rs 2 lakh crore. Between March and December 2017, the retail loan portfolio grew 10% to Rs 47,000 crore, while agri- and MSME-loans remained flat. The sources said the agri-loan portfolio may be expanded from around Rs 17,000 crore to nearly Rs 45,000 crore in five years.
The bank is saddled with over a quarter of its loans turning into NPAs, and over the next five years the plan is to reduce the proportion of gross NPAs to 10% of advances. IDBI Bank sources, however, said a large part of this is depended on the bankruptcy cases filed against various companies. Of the 12 highprofile cases, none have been finalised yet as promoters and bidders have used multiple judicial tracks to hold up decisions even as the 270 resolution deadlines near in almost every case.
Last May, RBI invoked the provisions of prompt and corrective (used for so-called weak banks) against IDBI Bank due to worsening asset quality and negative return on assets. The action puts curbs on expanding the loan portfolio and forces managements to initiate action to put the bank back on track.
The five-year strategy has been in the making for a while and is expected to factor in the recent government instructions on running banks and sanctioning loans.
Since the change of management at IDBI Bank, which saw M K Jain take over as managing director, the public sector lender has focused on cutting costs and selling non-core assets, including real estate, which is also part of the plan charted out by the finance ministry.
2017-18: At 83%, consumer durables loans grew most
The number of borrowers with consumer durable loans grew 83% to 1.95 crore in the 12 months ended March 2018 — the fastest expansion rate among all retail loans, followed by credit cards (28%) and personal loans (27%). Bankers say that the increase in retail borrowers is due to the use of credit scoring and analytics, which has helped take retail loans to new-to-credit customers.
According to a TransUnion (TU) Cibil report, total outstanding retail advances as of March 2018 increased 25% from March 2017. The number of outstanding accounts increased by more than 32% over the same period. “The number of live accounts rose considerably across all major credit types over the past year. The average balance per borrower grew at more modest levels,” said TU Cibil vice-president (research and consulting) Yogendra Singh.
Lenders like HDFC Bank and ICICI Bank are using analytics to enable customers avail of pre-approved loans online. Non-bank lenders like Bajaj Finance have developed online systems that enable loans to be cleared at retail outlets within minutes. E-commerce companies are partnering lenders to offer goods on equated monthly instalments (EMIs). In many consumer durables, the manufacturers are providing interest subvention, enabling customers to buy on credit without interest cost.
There are currently nearly 9 crore retail loan accounts across various segments such as auto, consumer durables, home loans, personal loans, credit cards and loans against property. Many borrowers have multiple loans. TU Cibil’s analytics show that nearly 15 crore Indian consumers who are not currently borrowers can be eligible for retail credit.
Another positive development is that while lenders are seeking lower income borrowers, delinquency has not gone up. Delinquency rates — 90 or more days past due (DPD) — for major retail lending products declined or remained relatively stable over the year ended March 2018. The quality of auto loan portfolio improved with delinquency rates falling by 83 basis points (100bps = 1 percentage point) to 2.78% in the first quarter.
The rising share of retail loans has implications for lenders. Very few banks are geared to tap the potential in retail lending. As a result, non-banking finance companies (NBFCs) contribute a significant chunk of retail loans. According to a report by ratings agency ICRA, retail-focused NBFCs (or retail-NBFCs) — with an estimated portfolio size of Rs 7.5 lakh crore in FY18 — will require Rs 3.8-4 lakh crore fresh debt in FY19 to support 20% growth.
Much of the growth in consumer durable loans has been driven by issuing higher volumes of smaller ticket loans. Consequently, the average loan per consumer declined by 5.7% over the year ended March 2018 to Rs 10,382.
The number of live credit card accounts stood at 3.26 crore as of March 2018 — an increase of 28% over the same period last year. Outstanding balance on credit cards increased by 43% to Rs 75,100 crore during the same period. Over the past two years, and particularly following the demonetisation event in November 2016, the number of credit card accounts had increased by nearly 50%, while the number of consumers with a card account has expanded as well. Consumer usage of those credit cards has also increased. The average credit card balance per borrower rose 12% to Rs 35,495 as of March 2018. “It is anticipated that the trend of increasing adoption of digital transaction channels should continue to act as a tailwind for future card growth,” said TU Cibil in its report.Personal loans saw similar growth dynamics, with the number of live consumers increasing 27% to 1.2 crore in the year ended March 2018, while aggregate balances increased 49% to Rs 2.7 lakh crore.
While retail loans are growing, delinquencies in these accounts are not. The delinquency rate for consumer durable loans (after 90 days) declined by 43bps year-over-year to reach 0.89% at the end of Q1, while the delinquency rate for personal loans dropped 19bps over the year to 0.52%. The credit card 90+ day delinquency rate increased modestly — by 9bps — to 1.70% in March 2018 but remains essentially unchanged from the level two years prior in March 2016.
Growth of credit, Jan 2018> Jan 2019
Non-food credit increased 13.1 percent in January 2019 compared to 9.5 percent in January 2018, RBI data shows. Services and retail segments were the driving force behind this double-digit growth. While the services sector grew a whopping 23.9%, personal loans too showed a double-digit growth. Industry, on the other hand, saw a mere 5% increase.
Jun 2018> Sept 2019
Growth of credit, Jun 2018> Sept 2019
2018 Jun- 2020 Jul
Credit and deposit growth in India, 2018 Jun- 2020 Jul
2018 Sept-2021 March
Bank credit growth in India, 2018 Sept-2021 March ‘'
2020- 2023 March
Credit growth credit 2 deposit ratio trend in Indian banks, 2020- 2023 March
2019, June to Nov
Indian banks’ deposit rates: 2019, June to Nov
Region-wise share of accounts- the share of urban and rural areas, and metros- 2007 and 2017
Region-wise share of deposits- the share of urban and rural areas, and metros- 2007 and 2017
Households contributed most to deposit growth in FY16, while deposits held by government agencies shrank according to data released by the Reserve Bank of India (RBI) on Monday . The latest numbers show that government and entities in the financial sector (banks in particular) brought down their deposits with other banks. However, individuals and corporate as increased their share of deposits.
Bank deposits in FY16 grew by 8.8%, or Rs 8.68 lakh crore, to Rs 98.41 lakh crore. Of this, growth in household deposits was 11%, or Rs 6.65 lakh crore.The overall deposit growth would have been higher but for 14% drop in state government deposits to Rs 3.82 lakh crore.Interbank deposits also fell 24.5% to Rs 2.71 lakh crore while corporate deposits jumped nearly 115% to Rs 10.65 lakh crore.
The RBI on Monday released the data on composition and institutional ownership pattern of deposits with sche Source: RBI duled commercial banks (SCBs) as on March 31, 2016. Households continue to own the majority of deposits with their share rising to 61.5% from 60.1% earlier. The government sector and the private corporate sector followed, contributing 12.8% and 10.8%, respectively. A majority (63.8%) of deposits were term deposits.
The number of bank accounts that women not only hold but also operate themselves has increased dramatically over the past five years, data from the 5th National Family Health Survey (2019-20) shows.
In 10 states and union territories, 80-90% of women account holders run their accounts themselves. Even in Nagaland, which is at the bottom of the 22 states and Union territories covered by the NFHS, 63.7% of women account holders operate their own accounts. The change since NFHS-4 in 2015-16 is significant.
76.7% of Bihar women operate bank a/cs now, up from 26.4%
In Bihar, for instance, the number of women operating their bank accounts rose from 26.4% to 76.7%. In Karnataka, from 59.4% to 88.7%. In Assam, from 45.4% to 78.5%, and in Gujarat from 48.6% to 70%.
When it comes to property ownership, the results are a mixed bag with the percentage of women property owners rising sharply in Karnataka between NFHS-4 and NFHS-5, but also falling in Assam and Bihar.
However, women now make up a significant number of mobile phone users. The share of women phone users ranges from 91.2% in Goa, down to just under 50% in Gujarat and Andhra Pradesh. In Sikkim, Kerala, Lakshadweep, Nagaland, Mizoram, Ladakh and A&N Islands, 80-89% of the women surveyed are mobile users.
Property ownership data in the latest NFHS reflects a wide variation across states and UTs. In terms of women owning a house or land alone or jointly, Ladakh is at the top of the list with 72.2% women, followed by Karnataka (67.6%), Telangana (66.6%) and Meghalaya (65%). In Manipur, J&K, Dadra, Nagar Haveli and Daman and Diu, Bihar and Sikkim, 53-58.4% of women own property. The share of women property owners dwindles to less than a third in 9 states and UTs.
The survey covers women aged 15-49 years across 17 states and five UTs and provides estimates on 131 key indicators.
Dormant bank accounts
2018: ₹11,300cr lying unclaimed with 64 banks
The largest amount — Rs 1,262 crore — is lying with the State Bank of India, Rs 1,250 crore with PNB, while all other nationalised banks together hold Rs 7,040 crore. All this money, howver, is just a fraction of the total deposits of over Rs 100 lakh crore handled by banks in India.
Former RBI chair professor at IIM-B Charan Singh says: “Most of these deposits would be cases of deceased account holders, or people with multiple bank accounts. It is unlikely that too much of it, or may be any of it, is benami or unaccounted money.”
Section 26 of Banking Regulation Act, 1949, mandates that banks submit a return of all accounts in India which have not been operated for 10 years to the RBI within 30 days after the close of each calendar year. But Section 26A says that it does not prevent a depositor or claimant from claiming the deposit or operating the account after the expiry of the period of 10 years and the banking company is liable to repay amount.
Money lying in dormant bank accounts is parked in the Depositor Education and Awareness Fund, which has been created under the provisions of the Banking Laws (Amendment) Act, 2012.
Among the private banks, RBI says that seven — Axis, DCB, HDFC, ICICI, IndusInd, Kotak Mahindra and YES Bank — have a total of Rs 824 crore in unclaimed deposits. Twelve other private banks together have Rs 592 crore, taking the total such money with private banks to Rs 1,416 crore.
Of all the private banks, ICICI Bank with Rs 476 crore and Kotak Mahindra Bank with Rs 151 crore have the highest unclaimed deposits.Comparatively, 25 foreign banks, whose operations are much smaller in size, account for Rs 332 crore in unclaimed deposits, with HSBC alone accounting for Rs 105 crore.
Total FDI flow, FY13- FY21
India’s companies are growing more dependent on banks to raise offshore funds going into 2019 as the bond markets sputter and local-currency funding from domestic banks dries up.
Borrowers that are facing challenges in the credit market are finding solace in dollar-denominated loans, even as non-performing debt at local banks, volatility in the rupee and uncertainty over national elections next year add to pressure on financing costs.
The downfall of shadow lender IL&FS group has fueled concerns about default risks, making banks cautious and pushing up the cost some firms pay for loans at home. Companies are increasingly turning to overseas lenders, as distressed assets of about $210 billion at India’s banks limit their capacity to lend rupee funds.
“Many issuers are looking at offshore loans due to low liquidity in the rupee debt markets,” said Durgesh Tinaikar, head of corporate and institutional banking at Mizuho Bank India. “Borrowers find offshore loans easier to raise funds, even though pricing is largely on an upward trend, mainly for banks and non-banking finance companies, due to political uncertainty and risks for volatility in the rupee.”
Borrowing cost trends
The big picture is that loan costs are heading up for some borrowers, but had fallen so much earlier that they are still lower this year on average. Average margins on Indian five-year foreign-currency loans are 130 basis points more than London interbank offered rate in 2018, the lowest since 2005, according to Bloomberg-compiled data. In comparison, spreads over Treasuries for dollar bonds of local issuers have risen 109 basis points this year to 275, according to ICE BofAML index data.
Some Indian companies are stomaching the recent uptick in loan rates. State Bank of India, the nation’s biggest lender, is paying a margin of 115 basis points over Libor for its new $500 million five-year loan, 10 basis points higher than its similar-tenor facility in 2017. Indian Oil Corp is offering 100 basis point margin on a $1.3 billion five-year loan, compared with 70 basis points on the refiner’s $300 million loan with the same tenor from a year ago.
“Some of the non-bank financial institutions and smaller banks in India have had some credit risk problems,” said John Corrin, global head of loan syndications at Australia and New Zealand Banking Group in Hong Kong. “Some of the companies are strong and will continue to have access to the foreign market, while others are less so and definitely will struggle to raise funds or will have to pay significantly more.” In the bond market, credit rating downgrades have weighed on sentiment toward some borrowers.
Citi tops foreign banks in profits, balance sheet
Citibank has become the largest foreign bank in India on most parameters, including profits and balance sheet size, and has emerged as the first foreign lender to cross $1billion in gross profits in recent years. HSBC, which saw its net profits almost double this year, has moved to the number two slot, edging out StanChart.
According to financial results published by the multinational banks, Citi reported a net profit of Rs 4,185 crore for the year ended March 2019 — up 23% from Rs 3,404 crore in the previous year. The highest gains have been recorded by HSBC, whose net profit jumped 95% to Rs 2,566 crore. Stan-Chart’s 14% increase puts it in the third position with a net profit of Rs 2,169 crore.
Citi also has the largest balance sheet of Rs 1.86 lakh crore as against Rs 1.76 lakh crore for HSBC and Rs 1.71 lakh crore for StanChart. All the three banks have improved their gross NPA ratios too during the year. While Citi’s GNPAs stood at 1.37%, HSBC was 0.89% and StanChart 9.1%.
There are around half a dozen foreign banks in India with multi-city operations, but business is largely with the top three. The other banks include Deutsche Bank, Barclays and American Express. Amex, despite having a bank licence, operates only in the credit card space. DBS, which operated as a foreign bank, has been given permission to incorporate locally. RBS and ABN Amro had earlier exited from retail banking in India.
Citibank’s number one position is a culmination of a decade of transformation after the global crisis. This period was almost co-terminus with the tenure of the three-term CEO Pramit Jhaveri, who took charge in April 2010 and stepped down in March this year. Jhaveri took over when the bank was still reeling from defaults in its unsecured smallticket personal loan portfolio, and bad loans were close to Rs 10,000 crore. To top it, in 2010, the bank was hit by an employee in Gurgaon defrauding clients of Rs 350 crore, which was compensated by the bank.
Jhaveri got the bank back on track by building on strengths and bringing about a cultural change. The bank used its USP of having the world’s largest network in 99 countries to acquire multinational clients and Indian companies with multinational ambitions. It held on to its core strength of cash management handling — 5% of the country’s GDP in transactions.
Announcing the results for FY19, current CEO Ashu Khullar attributed the earning to superior execution, global digital solutions and judicious expense management. The bank has an 11.7% marketshare in merchant forex flows and 7% in digital payments.
2021: Private banks eligible
The Centre announced that it has lifted the embargo on private sector banks for the conduct of government-related banking transactions, such as taxes and other revenue payment facilities, pension payments, and small savings schemes.
Although a few big lenders like ICICI Bank, HDFC Bank and Axis Bank already get a share of the government business, the Centre saw this as a sign that they would get more. Shares of private banks gained sharply following this announcement. HDFC Bank gained 5%, Axis Bank rose 4.6%, and ICICI Bank 4.4%.
“This step is expected to further enhance customer convenience, spur competition and higher efficiency in the standards of customer services. Private sector banks will now be equal partners in development of the Indian economy and in furthering the social sector initiatives of the government,” the Centre said.
It added that there is now no bar on the RBI for authorisation of private sector banks (in addition to public sector banks) for government business, including government agency business. Speaking to TOI, a senior banker said that the main revenue was the feebased business from the government . Bank unions pointed out that private banks are susceptible to failure. Incidentally, last year the Maharashtra government decided to shift all its deposits to public sector banks from private banks after the Yes Bank collapse.
Frauds committed in banks
3 Banks Advanced ₹7,000Cr Against Fraudulent Guarantees
Punjab National Bank (PNB) has said that it faces a contingent liability in respect of letters of undertaking (LoUs) that have been fraudulently issued to Nirav Modi and Mehul Choksi groups. The bank wrote letters to all major lenders on Wednesday, informing them of the fraud. Banks, which have lent on the basis of the LoUs issued by PNB, have an exposure close to Rs 11,000 crore. LoUs are like a bank guarantee that undertake to pay lenders if borrowers default.
Bankers says dozens of lenders have provided loans against the LoUs issued by PNB. Initial investigations suggest that Allahabad Bank, Axis Bank and Union Bank had funded close to Rs 7,000 crore on the strength of the LoUs, with Allahabad Bank having the largest exposure. However, a major chunk of the loans were sold down. SBI and Bank of Mauritius are understood to have a secondary exposure.
In banking circles, these loans are treated more like interbank exposures as lenders have recourse to the bank issuing the guarantee. These loans are also traded by banks among themselves in the same manner that they trade bonds. For instance, Axis Bank, which has funded some of the imports through its overseas branch, has sold some of the loans to other banks.
With no assurance from PNB that it will honour the fraudulent guarantees, financing banks will find themselves stuck for payment. Bankers fear a legal stalemate as those who purchased loans in the secondary market will approach the financing banks. The lenders, in turn, will approach PNB to invoke the guarantee. PNB’s caution letter to banks stating the LoUs are fraudulent are seen as an indicator that the bank is trying to deny liability.
Some banks are saying that the RBI will have to intervene to break the likely stalemate. In banking frauds that took place in earlier years, defaults ballooned in excess of the funds siphoned off as accounts were frozen and claimants went to court.
Lenders say that the RBI will have to intervene to prevent such a stalemate from occurring again. Although PNB denies liability on the grounds that the transactions are fraudulent, lender banks claim that since the transactions have gone through the Swift messaging platform — which is the basis for settling trade deals globally — the contracts have to be honoured.
Banking frauds, 2013-16
2012-17: 8,670 fraud cases, totalling ₹ 61,260 cr ($9.58 billion)
RBI data shows state-run banks have reported 8,670 'loan fraud' cases totalling Rs 61,260 crore over the last five financial years
In India, loan frauds typically refer to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan
Investors may have been shocked when one of India's biggest banks disclosed a $1.77 billion fraud by a billionaire jeweller, but the central bank has recorded data that shows the problem runs far deeper and wider.
Reserve Bank of India (RBI) data, which a Reuters reporter obtained through a right-to-information request, shows state-run banks have reported 8,670 "loan fraud" cases totalling Rs 61,260 crore ($9.58 billion) over the last five financial years up to March 31, 2017.
In India, loan frauds typically refer to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan.
The figures expose the magnitude of the problem in a banking sector already under pressure after years of poor lending practices. Bad loans surged to a record peak of nearly $149 billion last year.
Bank loan frauds have steadily increased as well, reaching Rs 17,634 crore in the latest financial year from Rs 6,357 crore in 2012-13, according to the data, which doesn't include the PNB case.
Punjab National Bank, India's second-largest state lender, said on Wednesday two junior officers at a single branch had illegally steered $1.77 billion in fraudulent loans to companies, most of them controlled by billionaire jeweller Nirav Modi. It was India's biggest fraud ever.
"This might be the tip of the iceberg or the middle, and that is the worry," said Pratibha Jain, partner at law firm Nishith Desai Associates, who advises on bankruptcy cases.
"The fact is we don't know what else is out there."
The RBI did not immediately respond to a request for comment. But in June 2017 the central bank, in its Financial Stability Report, called frauds in banks and financial institutions "one of the emerging risks to the financial sector".
"In a number of large value frauds, serious gaps in credit underwriting standards were evident," the RBI said, adding that some of the gaps include lack of continuous monitoring of cash flows and cash profits, diversion of funds, double financing and general credit governance issues in banks.
The RBI has been commended for forcing Indian banks to fully disclose its bad loans, speed up their recovery, and stop hiding fraud cases as non-performing assets.
Yet to some critics, the RBI has, at the same time, been too guarded about publicly sharing data on loan defaults or fraudulent loans. This is partly due to legal constraints on disclosing individual cases and worries investors would pummel the affected banks, making loan recovery even harder.
In fact, the numbers of loan fraud cases across India could be even higher since they only include cases reported to the RBI, which involve only loans of Rs 1,00,000 or more.
In its right-to-information request, Reuters sought data from 20 of India's 21 state-run lenders and obtained 15 replies.
PNB topped the list with 389 cases totalling Rs 6,562 crore ($1.03 billion) over the last five financial years, in terms of the total amounts involved.
Reuters was unable to obtain a detailed breakdown on the exact nature and method of the loan frauds the banks reported to RBI over the last five financial years.
After PNB, Bank of Baroda had the highest amount of loan fraud reported, with Rs 4,473 crore from 389 cases and Bank of India ranked third, with loan frauds totalling Rs 4,050 crore from 231 cases over the same period, the data shows.
India's biggest lender, State Bank of India reported 1,069 loan fraud cases in the last five financial years but did not disclose the amount.
It was also unclear how much has been recovered by the banks over the years.
The magnitude of the bad debt in India forced the government last year to bail out the sector by pledging to inject $32 billion over this financial year and next.
Yet analysts and credit rating agencies have long warned that solving the bad debt at India's banking sector needs to also involve wholesale reforms of the lending practices that led to the surge in bad loans.
Bankers have been blamed for steering funds to politically connected business tycoons, such as Vijay Mallya, without due diligence, or after being pressed by government officials to steer funds to sectors it wanted to promote, such as infrastructure.
Mallya stands accused in India of fraudulently palming off losses from his now defunct Kingfisher Airlines onto banks by taking out loans he had no intention of repaying, an allegation he denies.
Nirav Modi, the jeweller accused in the PNB fraud case, posed for pictures with Indian Prime Minister Narendra Modi at the World Economic Forum in Davos, Switzerland, where he was part of India's delegation of corporate leaders.
The Bharatiya Janata Party (BJP) has denied any link with Nirav Modi, who is not related to the prime minister.
2013-16: PS banks lost Rs 2,450 crore to frauds involving staff
Southern states, including Maharashtra, has 49% (609) of all cases, but reported just 19% of the total money lost
In comparison, Rajasthan, which has just 3% of cases with employee involvement, accounts for 44% of money involved
Among other things that emerged in the aftermath of the massive Punjab National Bank (PNB) scam is the active role of employees of the Public Sector Banks (PSBs) in multiple frauds over the years. TOI has accessed Reserve Bank of India data that reveals the number of cases involving staff across various states and the amount of loss reported.
Overall, data from April 2013 to June 2016 shows that a total of Rs 2,450 crore was lost to 1,232 frauds of Rs 1 lakh and more where employees were involved. RBI is yet to classify state-wise data for subsequent quarters.
Of these, southern states, including Maharashtra, has 49% (609) of all cases, but account for just 19% (Rs 462 crore) of the total money lost to such crimes. In comparison, Rajasthan, which has just 3% (38) of cases with employee involvement, accounts for 44% (Rs 1,096 crore) of money involved.
Tamil Nadu, Andhra Pradesh, Karnataka and Maharashtra have the most cases of staff involvement in frauds (in the same order) in the country while Rajasthan, Chandigarh, Delhi and West Bengal lost the most money, collectively accounting for 70% of all the money lost (in the same order).
The RBI mandates that “Cases of fraud involving Rs 1 lakh and above, committed by outsiders on their own and/or with the connivance of bank staff/officers must also be reported." But these cases do not account for smaller cases of employee fraud, which experts say also run into crores of rupees.
One bank manager who did not wished to be named, said: “One of the reasons you see more number of such cases in the South could be because there are more bank branches in these states which have more number of urban centres. However, that is no excuse to have high crime rate, especially involving staff.”
Analysing the data, one expert said that it is most likely that frauds in Rajasthan and other states that lost the most money, could all be related to advances, while those from the Southern states could be related to deposits.
“When money is being lent as loan, the exposure is generally higher, as opposed to deposit-related frauds which generally do not involve large amounts of money,” he explained. Multiple experts argue that lack of good practices, including allowing employees to work at the same section and branch for long periods, have been hurting PSBs.
The RBI says “that banks should follow the guidelines for reporting frauds such as unauthorised credit facilities extended by the lender for illegal gratification, negligence and cash shortages, cheating, forgery, et al to the state police authorities.”
It adds that while dealing with such cases, the banks should not merely be motivated by the necessity of recovering expeditiously the amount involved, but should also be motivated by public interest and the need for ensuring that the guilty persons do not go unpunished.
Frauds Over Rs 1 lakh Involving Staff & Money Lost:
No. of cases
% To Total Cases
% To Total Loss
Rs 83.09 cr
Rs 148.41 cr
Rs 89.34 cr
Rs 110.43 cr
Rs 30.53 cr
Rs 1,096 cr
Rs 253.44 cr
Rs 188.22 cr
Rs 167 cr
Rs 41.6 cr
21 Other States
Rs 241.53 cr
Rs 2450 cr
2013-18/ over 23,000 cases of fraud committed- RBI
A total of 5,152 cases of fraud, up from over 5,000 cases in 2016-17, were reported in banks from April, 2017, to March 1, 2018, the Reserve Bank said
In 2016-17, banks had reported 5,076 cases of fraud involving Rs 23,933 crore
Over 23,000 cases of fraud involving a whopping Rs 1 lakh crore have been reported in the past five years in various banks, according to the Reserve Bank of India (RBI).
A total of 5,152 cases of fraud, up from over 5,000 cases in 2016-17, were reported in banks from April, 2017, to March 1, 2018, it said in reply to an RTI query filed by this correspondent.
The highest ever amount of Rs 28,459 crore is said to have been involved in these cases of fraud reported from April, 2017, to March 1, 2018, the central bank said.
In 2016-17, banks had reported 5,076 cases of fraud involving Rs 23,933 crore.
From 2013 to March 1, 2018, as many as 23,866 cases of fraud, of Rs 1 lakh or above in each case, were reported. A total of Rs 1,00,718 crore was involved in all the cases put together, according to the RTI reply.
Giving the break-up, the RBI said 4,693 such cases (involving Rs 18,698 crore) and 4,639 cases (involving Rs 19,455 crore) were reported in 2015-16 and 2014-15 respectively.
In 2013-14, banks reported 4,306 cases of fraud, involving Rs 10,170 crore, the central bank said.
"The reported fraud cases are processed and action is taken according to the facts and circumstances of individual cases," the RBI said.
The data assumes significance as central investigating agencies such as the CBI and the ED are looking into various big-ticket fraud cases in banks involving industrialists and others.
Among the prominent ones is the over Rs 13,000-crore fraud in the Punjab National Bank (PNB) allegedly committed by diamantaire Nirav Modi and his uncle Mehul Choksi, the promoter of Gitanjali Gems.
The CBI had recently also booked top officials of two public sector banks, a former CMD of the IDBI Bank, former Aircel promoter C Sivasankaran, his son and companies controlled by him in connection with a Rs 600-crore loan fraud in the IDBI.
The CBI has named 15 bank officials who worked at senior levels at the IDBI in 2010 and 2014 when loans were sanctioned to the companies controlled by Sivasankaran in its FIR registered on a complaint from the Central Vigilance Commission.
Managing Director and CEO of Indian Bank Kishor Kharat (who was then MD and CEO of IDBI Bank) and his counterpart in Syndicate Bank Melwyn Rego (then Deputy Managing Director in IDBI Bank), along with then Chairman-cum- Managing Director of IDBI Bank M S Raghavan, have been named in the latest FIR filed by the CBI.
According to government data, the gross non-performing assets (NPAs) of all banks in the country, amounting to Rs 8,40,958 crore in December 2017, were led by industry loans followed by those in the services and agriculture sectors.
The highest amount of gross NPAs was for the country's largest lender, the State Bank of India, at Rs 2,01,560 crore.
Among the others, the NPA for PNB stood at Rs 55,200 crore and for IDBI Bank, Rs 44,542 crore. Bank of India had NPAs worth Rs 43,474 crore; Bank of Baroda, Rs 41,649 crore; Union Bank of India, Rs 38,047 crore; Canara Bank, Rs 37,794 crore and ICICI Bank, Rs 33,849 crore, according to data presented by Minister of State for Finance Shiv Pratap Shukla in the Lok Sabha on March 9.
Bank frauds in India, 2014-19
Frauds in Indian banks, 2014- 20
2015-17: PSB staff punished for committing fraud
On an average, at least one banker is caught and punished for involvement in fraud every four hours, an analysis of data compiled by the Reserve Bank of India has revealed.
Between January 1, 2015 and March 31, 2017, as many as 5,200 officials of public sector banks have been punished for fraud.
“These employees have been convicted, awarded penalties, including dismissal from service,” the RBI document states. The central bank is in the process of compiling the data for such cases from April 2017.
While 1,538 officials of the State Bank of India faced action for fraud, putting the bank on top of the chart, Indian Overseas Bank and Central Bank of India occupy the second and third place with 449 and 406 insiders, respectively, being found guilty.
Between ’13 & ’16, all banks lost ₹66k cr to 17,504 frauds
At Punjab National Bank (PNB), 184 officials were caught for fraudulent activities during the same period. The numbers assume significance as multiple agencies are now digging deeper to unearth insider role in the massive fraud at PNB.
Netrika Consulting managing director Sanjay Kaushik, whose clientele include banks, says that banks spent too much time looking outside their walls for frauds, and thus have ignored introducing networkwide risk frameworks.
Concerned, the RBI has been issuing circulars to banks about how to effectively report cases and also put in place mechanisms to prevent them. A July 2016 circular, the latest in a series, reads: “To compress the time taken in detection of fraud, a framework for handling loan frauds has been put in place.”
Bikash Gangadharan, a senior manager with a multinational bank, says: “...There should be multiple levels of authentication… But the Indian banking system is extremely hierarchical… If the manager says something must go through, nobody says that it must need a second review, which is a risky way of running things.”
While this set of data does not reveal the financial loss banks suffered due to employees committing fraud, separate data accessed from RBI for the period between April 1, 2013 and December 31, 2016 shows that all commercial banks, including private ones, lost Rs 66,066 crore to 17,504 frauds.
Of the total number of frauds, 2,084 cases saw the involvement of insiders, accounting to 12% of the cases. But the data does not say how much money was involved in the frauds committed by the employees.
“It is obvious that banks have not been able to identify and take proactive steps to mitigate known risks. This makes it hard to pinpoint who is involved. The top management is definitely at fault for failing to put in place a clear compliance strategy,” says Tobby Simon of Synergia Foundation, a multi-disciplinary thinktank.
Most of the foreign banks employ efficient frameworks for risk reporting that help in identifying the patterns. Risk frameworks have algorithms that pinpoint a particular threat.
Jatinder Pal Singh, who had worked with a multinational corporation bank’s IT risk management team for seven years, says that service providers such as IBM have even developed software that flag frauds.
2016-17/ 86% of all bank frauds, 99% of PNB’s, tied to loans
From misuse of letters of credit, guarantee or undertakings to diversion and siphoning of funds, a variety of frauds linked to advances haunt the Indian banking system, indicating a lack of hygiene and risk frameworks.
While 86% of all frauds in India for 2016-17 are linked to advances, it was 99% at Punjab National Bank (PNB) which, experts say, points to collusion with insiders. Also, 26 banks reported that more than 97% of their frauds were advance-related, of which 15 peg it at 99% or more. Eight banks said such frauds account for 90%- 95% of frauds.
Data of the Reserve Bank of India show that of Rs 23,903 crore lost to fraud in 2016-17, 86% (Rs 20,561 crore) was lost to advance-related fraud. In PNB, of Rs 2,808 crore lost to fraud, Rs 2,788 crore (99.3%) was linked to advances.
28% increase in cases: While RBI is compiling figures for 2017-18, data for three years ending March 31, 2016 show that 67% of total frauds were linked to advances, indicating a 28% increase. In 2016-2017, banks lost Rs 22,743 crore to fraud, of which Rs 15,238 crore was linked to advances.
According to experts and bankers, advances-related frauds are due to breach of trust and contract, and involve misuse of letters of credit or guarantees, submission of forged or fake documents to avail of loans and mortgaging of assets that don’t exist or have been pledged elsewhere, among other things.
Bankers guilty of collusion:
Prof Charan Singh, RBI Chair Professor, IIM-B, says: “So long as there is money, the greed to obtain it in whichever way possible cannot be rid from the system. What government and banks can do is install systems that minimise such frauds. We need an overhauling, from period transfers of all employees in banks to making top management and directors liable, a complete cleansing of the system is needed.”
A working paper titled “Frauds in the Indian Banking Industry”, published by Prof Singh and associates, points out: “Big frauds aren’t so easy to commit and often result because bank officials collude with borrowers, and sometimes even with officials of third parties such as advocates or chartered accountants.”
It adds that third parties often get away as it is nearly impossible for banks to prove criminal intent due to various reasons, such as lack of understanding of legal matters, and lack of expertise and legal advice, and unwillingness to reveal sensitive data to courts/ public domain.
Netrika consulting managing director Sanjay Kaushik said such frauds indicate a larger systemic issue that needs addressing professionally, using globally-accepted tools and best practices, and mere troubleshooting after a scam has been unearthed won’t help.
“To mitigate risks, it’s imperative for the banking sector to move towards employing an independent party during the credit sanctioning process. It’s now critical to validate and verify claims made by individuals seeking loans. An independent audit must be conducted to verify if funds procured are being used for which they were intended,” said Rohit Karnatak, managing director, India, APAC & EMEA — Global Screening, Pinkerton (a corporate risk management services firm).
2017: CVC discussed jewellery firms’ irregularities with CBI, ED, PSU bank vigilance
A year before the Rs 13,500 crore Nirav Modi-Mehul Choksi scam came to light, the Central Vigilance Commission (CVC) had sounded an alarm over irregularities in the gems and jewellery sector.
On January 5, 2017, the commision met senior CBI and ED officials as well as the chief vigilance officers of 10 banks, including Punjab National Bank, to discuss serious irregularities in the accounts of some jewellery firms, particularly those of Jatin Mehta’s Winsome group, says CVC’s annual report for 2017. PNB, which was the lead bank in one of the loans given to Mehta as well, has been left grappling with the Modi-Choksi scam after the duo, in collusion with some bank officials, illegally renewed letters of undertaking. They left India with their families in the first week of January this year and a case was registered soon after. The CVC report puts the focus on PNB’s senior management’s lapses.
Bizman Mehta fled India after taking loans of ₹6,200cr
Chief vigilance commissioner K V Chowdary told TOI, “That meeting was called to discuss frauds committed on banks by Jatin Mehta of Winsome group.” It also discussed issues related to frauds by other jewellery firms, loopholes in the banking system, enquiry procedures by CVOs, borrowers’ accounts and gold import.
The Modi-Choksi fraud had not been discovered then but PNB was the lead bank in one of the loans given to Mehta as well. The bank reportedly had an exposure of Rs 1,658 crore with Mehta, who is now said to be living in St Kitts. In all, Mehta fled after taking loans of Rs 6,200 crore.
Senior government officials said that PNB, which was already a victim of fraud, should have checked its accounts relating to the sector more carefully and this might have put the focus on Modi and Choksi’s companies. “Had PNB done that, the two might have been held,” a CBI officer said.
The CVC had also advised the RBI as well as the department of financial services (DFS), which comes under the finance ministry, to issue an advisory to banks to ensure control over forex remittances purportedly for the purpose of imports and that banks should have specific standard operating procedures (SOPs).
The CVC report said it had been dealing with issues related to the core banking system, which was not updated by PNB officials in the case of loans given to Modi and Choksi, human resource management systems (HRMS) and projects of development of IT infrastructure in the banking sector.
Concerned with the problems, the CVC had recommended systematic improvements in the banking sector last year.
The commission had noticed irregularities in import transactions such as non-compliance of Know Your Customer/Anti-Money Laundering (KYC/AML) guidelines while opening of account, absence of due diligence on the Indian importer and the overseas supplier, violation of bank’s guidelines and breaching the limit of advance remittances several times which was exploited by borrowers.
The CVC observed while examining a case that KYC documents, proof of income and other documents submitted by the borrower were forged. The commission observed that “there is no uniformity in the banking sector” on the issue of appointment of outside agencies.
2018-19: Bank fraud rises 73%
Bank fraud rises 73% in FY19: RBI
New Delhi: Over 6,800 cases of bank fraud involving an unprecedented Rs 71,543 crore, a 73% rise, have been reported in 2018-19, the Reserve Bank of India (RBI) has said.
A total of 5,916 such cases were reported by banks in 2017-18 involving Rs 41,167 crore, it said. In the last 11 fiscal years, a total of 53,334 cases of fraud were reported by banks involving a massive amount of Rs 2.1 lakh crore, the central bank’s data said. During 2008-09, a total of 4,372 cases were reported involving an amount of Rs 1,860 crore. In 2009-10, Rs 1,999 crore worth fraud was reported in 4,669 cases. AGENCIES
Lenders Take Over 4 Years To Report Large Cases
Banks take more than four and a half years to report large frauds of over Rs 100 crore after their occurrence. This observation comes from the RBI in its annual report for 2018-19 — a year in which the central bank levied record fines on 20 banks for delayed reporting of frauds. In some of the cases, the RBI said that banks did not report the fraud even after investigative agencies initiated action.
“The average lag between the date of occurrence and its detection by banks was 22 months. The average lag for large frauds, i.e. above Rs 100 crore, amounting to Rs 52,200 crore reported during 2018-19, was 55 months,” the RBI said in its report. Fraud cases involving an amount of less than Rs 1 lakh were only 0.1% of the total amount involved.
The number of fraud cases reported by banks in 2018-19 rose 15% with the amount involved rising 73.8%. Nearly all these frauds related to occurrences in earlier years.
Among bank groups, PSBs, which constitute largest market share in bank lending, have accounted for the bulk of frauds followed by private sector banks and foreign banks.
In terms of area of operations, frauds related to advances constituted the preponderant share of the total amount involved in frauds in 2018-19, while the share of frauds in offbalance sheet items declined from the previous year. In terms of the number of frauds too, those related to advances were predominant, followed by card/internet-related frauds and deposits-related frauds.
Given the increase in frauds, the RBI has said that it will coordinate with various agencies including the corporate affairs ministry to examine the feasibility of interlinking various.
March 2018- March 19
MUMBAI: After rising for seven years, non-performing assets reported by banks are showing a decline, helped by a conducive policy environment and the Insolvency and Bankruptcy Code (IBC), the Reserve Bank of India (RBI) said in its report on trend and progress of banking in India, a development that brings some cheer for the financial sector and policymakers grappling with the problem of bad loans.
The report also pointed out that the credit growth remained muted while the health of cooperative banks continued to decline, marked by the crisis in city-based PMC Bank.
The gross NPAs declined to 9.1% in March 2019 from 11.2% in March 2018 as recognition of bad loans neared completion, the report noted. “Decline in the slippage ratio as well as a reduction in outstanding GNPAs helped in improving the GNPA ratio. While a part of the write-offs was due to aging of loans, recovery efforts received a boost from the IBC.
The restructured standard advances to gross advances ratio began declining after the asset quality review (AQR) in 2015 and reached 0.55% at end-March 2019,” the report said.
The report showed that all bank groups recorded an improvement in asset quality, with PSBs experiencing a drop both in the GNPA and in the net NPA ratios. However, the deteriorating asset quality of private banks in terms of the GNPA ratio is due to the reclassification of IDBI Bank as a private bank effective January 21, 2019. If IDBI Bank is excluded as a private bank, GNPA ratio of these banks showed a decline.
Recovery of stressed assets improved during 2018-19 mainly because of resolutions under the IBC, which contributed more than half of the total amount recovered.
However, recovery rates yielded by major resolution mechanisms (except Lok Adalats) declined in 2018-19, especially through the SARFAESI mechanism. “Cases referred for recovery under various mechanisms grew over 27% in volume and tripled in value during the year, leading to a pile-up of bankruptcy proceedings. This highlights the need to strengthen and expand the supportive infrastructure,” the report said. Experts said a turnaround in credit growth is unlikely soon.
“The RBI report flags the reduction in banks’ NPAs as well as better capital buffer enjoyed by PSU banks of late.
However, credit growth stays markedly weak in recent months, year-on-year growth in bank credit had been in single digits, with industrial credit lagging retail lending,” said Siddhartha Sanyal, Chief Economist & Head of Research, Bandhan Bank. “Despite the RBI cutting rates and abundant liquidity with the banking system, a quick turnaround in credit growth is not expected as consumer and business confidence remain weak, while banks adopt a cautious stance.”
HYDERABAD: In a dubious distinction, Hyderabad has topped in banking frauds in south India. Out of 11 major frauds reported in 2019, seven cases have its origins in Hyderabad. Bengaluru and Chennai have two such cases each, according to a CBI data.
The fraud amount crossed Rs 4,500 crore involving Hyderabad-based companies alone, Banking Securities and Fraud Cell (BSFC), a unit of CBI based in Bengaluru, said.
In many cases, bank officials were not named as accused. Also, 2019 saw an increase in banking frauds when compared to 2018, a fact confirmed by the Central Crime Station (CCS) sleuths.
Apart from this, two cases of banking frauds pertaining to Telangana have been registered with the Economic Offences Bureau (EOB) of CBI, Chennai, and 11 cases of frauds with ACB, Hyderabad.
In the latest case involving Transstroy (India) Ltd, a construction company owned by former TDP MP Rayapati Sambasiva Rao, Rs 3,822 crore was diverted and Union Bank of India reported a loss of Rs 300 crore. The total NPA was Rs 8,500 crore, sleuths said.
According to CBI data, politician Vakati Narayana Reddy-owned VNR Infra duped banks of Rs 62 crore. The CBI-Bengaluru cell registered a case in July 2019 in this regard. In another case booked with CBI in the same month last year, Hyderabad-based Musaddilal Jewellers Exporters Private Ltd duped Indian Overseas Bank to the tune of Rs 75 crore.
Totem Infra duped IDBI of Rs 220 crore, while Union Bank of India was cheated by Minerva Executive Apartments of Rs 35 crore. Syndicate Bank suffered a loss of Rs 46 crore at the hands of South India Exim, while SBI suffered Rs 30-crore loss thanks to Quench Soft. PCH Corporation is accused of cheating banks of Rs 28 crore.
In cases booked with EOB-Chennai, BNR Infra was accused of causing a loss of Rs 8 crore to SBI. Sudhanshu Exim Pvt Ltd caused Rs 8.7 crore loss to the banks.
Anti-corruption activist M Padmanabha Reddy explained that no fraud can happen without active connivance of senior bank officials. “CBI should go after the bank officials and big corporates. In many cases, bankers are not even filing complaints against the companies,” he told TOI.
When contacted, CCS DCP Avinash Mohanty said banking frauds had seen a rise in 2019 when compared to 2018. “We have received several cases of banking frauds, with some running into several lakhs.
2019: frauds surge to 90%
Loan frauds as a percentage of total banking frauds jumped to 90% in fiscal 2019 from 55% in fiscal 2018 after regulatory standards were changed for banks reporting non-performing assets (NPAs). Loan frauds increased year-over-year to Rs 64,548 crore in 2019 from Rs 22,558 crore, even as frauds in other segments — such as debit & credit cards, online banking and forex — declined.
Interestingly, the share in these frauds of public sector banks (PSBs) is as high as 90% in terms of the amount lost. And for high-value frauds — that is, Rs 50 crore or more — the share of PSBs rose higher to 91.6%. “This mainly reflects the lack of adequate internal processes, people and systems to tackle operational risks,” the RBI said in a recent report. It also said that the “spike in the number of cases was because of the time period when banks chose to report the fraud, whereas the graph would be trending lower if analysed on the basis of the date of occurrence of the fraud”. This could indicate a lag in reporting on the part of the bank or a delay in detecting the fraud.
The report also pointed out that the sharp spike in loan frauds this year was because of a change in regulations that called for tighter scrutiny of NPAs to ensure early detection of fraudulent loan accounts. “In February 2018, the government issued a framework for timely detection, reporting and investigation relating to frauds in PSBs, which required them to evaluate NPA accounts exceeding Rs 50 crore from the angle of possible frauds, to supplement the earlier efforts to unearth fraudulent transactions. This appears to have caused the sharp jump in reported frauds,” the report noted.
Another concern is the rise in the frauds in the retail loan segment, traditionally considered a low-risk segment. Bankers said the trend of instant five-minute online loans, same-day loans, etc, are the reasons for lower due diligence, resulting in higher frauds.
On the positive side, cases of people losing money due to skimming of debit cards at ATMs or PoS machines, online banking frauds and others trended lower. Internet/card fraud declined 35% to Rs 71crore, indicating that the RBI’s push for banks to move from magnetic stripe to EMV chip-based cards, that are more secure, has worked in preventing frauds.
The report further showed that deposit frauds also tended lower to Rs 147 crore from Rs 457 crore a year earlier, indicating that banks are enforcing tougher KYC norms to prevent money laundering, roundtripping and other frauds.
Hall of shame
SBI funds bomb-makers
The Times of India, Jun 20, 2016
Top bank in `Hall of Shame' for funding bomb-makers
SBI has been named in a “Hall of Shame“ list of 158 banking and financial institutions globally that have invested billions of dollars in companies making cluster bombs. SBI is the only Indian entity on the list, which includes JP Morgan, Barclays, Bank of America and Credit Suisse that invested over $28 billion in seven producers of cluster munitions between June 2012 and April 2016, according to Dutch campaign group PAX.PAX said the Convention on Cluster Munitions bans use, production of cluster munitions. This convention was signed by 94 countries. The maximum number of 74 banks are from the US, followed by China (29).
SBI has been included in the list because of its exposure to Orbital ATK, a USbased company specialising in space and rocket systems.
“SBI has made $87 million available to the companies on the red flag list since June 2012,“ PAX said. “ SBI always works in accordance with local laws and regulations,“ a bank spokesman said.
August 2017: SBI owes 27% of bad loans
SBI accounts for over 27% of the total amount owed to public sector banks by wilful defaulters. As many as 1,762 wilful defaulters owed SBI Rs 25,104 crore as on March 31, putting pressure on its balance sheet. Punjab National Bank (PNB) is next on the list with 1,120 wilful defaulters having outstanding non-performing assets (NPAs), or bad loans, of Rs 12,278 crore.
Together, these two banks account for Rs 37,382 crore -or 40% -of the total outstanding loans of Rs 92,376 crore due to public sector banks by wilful defaulters, according to finance ministry data. This is more than 20% higher than Rs 76,685 crore at the end of the previous fiscal 2015-16.
At the same time, there has been close to 10% increase in the number of wilful defaulters on an annual basis. It increased to 8,915 at the end of March as against 8,167 in the previous fiscal. Out of 8,915 cases of wilful defaults, banks have filed FIR (first information report) in 1,914 cases with outstanding loans of Rs 32,484 crore.
During 2016-17, 27 public sector banks, including SBI and its five associates, had written off Rs 81,683 crore -the highest in the last five fiscals.
2015-17: PNB, UBI top list of officials prosecuted
Among 30 Who Faced Music, 5 Each Were From These 2
In yet another indication of systemic glitches dogging banks in India, Punjab National Bank (PNB), along with United Bank of India (UBI), has reported the highest number of officials prosecuted for corruption.
Between 2015 and 2017, the Central Vigilance Commission (CVC) sanctioned the prosecution of 30 officials of 13 banks. Of the 30 people prosecuted, five (16%) each were from PNB and UBI.
State Bank of India (SBI), with four of its officials being prosecuted, is in third place. Overall, year-wise data shows that 2015 had the most number of sanctions (11), followed by 2017 (10). In 2016, prosecution of nine officials was cleared. All the cases against these 30 officials were registered under the Prevention of Corruption Act, 1988.
This is apart from all officials of public sector banks (PSBs) involved in various frauds (not referred to CVC) — which stands at 5,000 for the same period — who have either been convicted, dismissed or awarded penalties.
Looking at the three banks in this category — PNB, UBI and SBI — the last bank had the most number of officials involved in fraud (1,538), followed by PNB (184) and UBI (141). There are 24 other banks which together accounted for 3,137 officials, with some banks reporting more cases than PNB.
While the Reserve Bank of India (RBI) has been issuing various guidelines and circulars about prevention of corruption and reporting of fraud, experts say unless the top management is punished, the issue will continue to plague the banks.
“The punishment needs to be demonstrative and overarching. While there is no need to politicise and overreact, this is not something the country can ignore any longer,” Prof Charan Singh of IIM-B told TOI.
The CVC, which maintains that PSBs and the government are committed to a ‘zero tolerance’ approach to corruption, has given its sanction to several investigating agencies, including the CBI.
IT spending: 2018-20
IT spending by Indian banks: 2018-20
Insurance of bank deposits
1982: 75% of deposits were covered, 2018: 28%
Protection of deposits in Indian banks through insurance is among the lowest in the world in India, at Rs 1 lakh per bank account (about $1,508), well below the level in developed economies and even other BRICS nations.
While the deposit insurance extended in India covers 70% of depositors in terms of number, only 7.8% of the deposit base comprises deposits below Rs 1 lakh. What this means is that risk-averse people who choose bank deposits to park their life savings could lose a large chunk of their funds if there is a bank failure.
The issue of depositor protection, which last came to the fore when late finance minister Arun Jaitley introduced the Financial Resolution and Deposit Insurance Bill in 2017, has again gained importance in the wake of the PMC Bank failure and reports of other private banks coming under RBI’s scanner.
‘In 1982, 75% of bank deposits were covered, 28% in 2018’ According to a report by State Bank of India’s research department, while 75% of bank deposits were covered under insurance in fiscal year 1982, this dropped to 28% in 2018. The FRDI bill became controversial because of its suggestion that bank depositors be asked to share part of the cost of resolution of a failed bank and was consequently shelved.
“If we compare India with BRICS group of countries like Brazil and Russia, the comparative insurance figure rises to Rs 42 lakh & Rs 12 lakh respectively! If we compare the deposit insurance limit in India with countries having similar per capita income, we find that the insurance cover is even unlimited in some countries,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India. The coverage is very low even when the insurance amount is seen as a percentage of per capita income -- 0.7% for India compared with 3.7% in Australia, 4.4% in the US and 7.4% in Brazil.
In India, deposit insurance is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which collects a premium of 0.05% on the entire outstanding deposit. This means that a bank whose deposits are largely high value, ends up paying premium on even that portion of deposits that are not covered.
However, a key difference between India and other markets is that no scheduled commercial bank has been allowed to fail since liberalisation, with RBI and government ensuring that failed banks are acquired. Bank failures have been restricted to the cooperative sector. According to the DICGC annual report it has paid Rs 4,822 crore in claims in respect of 351 co-operative banks since inception.
According to Vishwas Utagi, convener of the PMC Bank depositors’ association, all the funds of depositors should be protected. “Why should depositors not get 100% cover? Just like the government assures customers of Life Insurance Corporation, similar assurance is needed for bank deposits,” he said. Utagi added that public sector banks, which were meant to reach out to all Indians, will be shrinking after mergers. Given this backdrop, customers of cooperative banks should be protected.
2013, 2018: Real Interest rates
The weakening rupee is reminiscent of the forex markets in 2013. But the Indian macro situation now is much better than it was five years ago, with one indication being the real policy rate (adjusted for inflation)…
2013, 2018- Real Interest rates in India, China and other major countries
2016: Real Interest rates
2016: Real Interest rates in India, China and other major countries
2018: Real rates in India among highest
RBI May Alter Stance To Neutral On Cheaper Oil
Real interest rates in India have been the highest across countries as well as over time as inflation has undershot targeted levels. According to ICICI Bank, the unexpected drop in international crude prices is likely to compel the RBI to change its stance from calibrated tightening to neutral.
“In India, we have been targeting inflation of 4% and the repo rate has accordingly been kept at two and half percentage points above this. But actual inflation has been much lower, resulting in high real rates,” said B Prasanna, head of markets at ICICI Bank. Real rates are the nominal rates adjusted for inflation, but they can be determined only for the past since inflation can be observed only in hindsight.
“Earlier, when the policy was targeting wholesale prices, there have been instances when real rates were negative despite repo rate being at 9% because of high inflation,” said Prasanna. He added that the present high real rates improve the attractiveness of Indian bonds.
Going forward, however, inflation is expected to firm up. ICICI Bank has forecast consumer price index (CPI) to average around 4% for the first half of FY20, but then pick up sharply in the second half. The key risks are a possible reversal in food prices and the government slipping on its fiscal deficit target.
The stress in the farm sector due to low food prices is expected to keep consumption demand in check. This will keep economic growth contained at 7.4% in FY20, which will be marginally better than the 7.2% forecast for FY19. This would be because the economy would have finished its transition to the goods & services tax (GST) regime, resulting in higher formalisation.
The biggest positive news in 2018, however, is the sharp fall in crude oil prices, which will result in balance of payments swinging to the positive. This, coupled with the likelihood of the US Federal Reserve pausing rate hikes, has turned out to be positive for the rupee, which has staged a smart recovery in recent weeks. “The fall in oil prices would also benefit high-yield current account deficit countries such as India and Indonesia,” said Prasanna.
Investment banking fees in India, 2016-2020
Government securities/ G-Secs
i) The monthly average yield of 10-year-G-Secs, and
ii)the trading profits of Indian banks, from Q4 of 2015-16 to Dec 29 2017.
Letters of undertaking
What is a letter of undertaking/ LoU
What is a letter of undertaking (LoU)?
An LoU is a guarantee issued by one bank to another. In trade finance, an LoU is sent in the form of a message using SWIFT (earlier known as society for worldwide interbank financial telecommunication), a secure messaging platform. Think of it as moder n-day telex.
An instruction on money transfer sent through SWIFT is equivalent to a demand draft issued to the bank at the other end.
How did the recently unearthed fraud take place?
PNB employees fraudulently, in connivance with the accused, sent LoU messages over SWIFT favouring the Nirav Modi/Mehul Choksi group companies. For an overseas bank branch, an LoU message over SWIFT is a sufficient guarantee, on the basis of which it will provide funds to the beneficiary mentioned, as happened in this case.
What if PNB does not honour its guarantee?
The lender who has invoked the guarantee will have to classify PNB as a defaulter. The loan will have to be classified as a non-performing asset and provisions made out of the bank’s profits. The lending bank will legally pursue recovery with PNB. There is also a possibility that overseas lenders might not accept LoUs from PNB.
Who are the parties affected by the fraud?
PNB has said the fraudulent guarantees total around Rs 11,300 crore. Lenders have already started making claims on PNB, assuming that Nirav and Choksi are unlikely to repay. Some of the lenders have sold the loans to other banks. These secondary buyers can try their luck by pursuing a claim with either the selling bank or PNB, the original guarantor. If they feel they will get a quicker decision in the global markets, they may choose to pursue the seller overseas where the loan was sold to them.
What are the regulatory implications of a PNB default?
Since the buyer’s credit has been extended in overseas markets, the lenders might choose to pursue claims with PNB offshore. The local regulators are likely to get involved and pull up the branches of Indian banks.
2018: RBI bans letters of undertaking, letters of comfort
The Rs 12,700-crore fraud at Punjab National Bank has prompted the Reserve Bank of India to ban use of letters of undertaking (LoUs) and letters of comfort (LoCs). LoUs and LoCs are instruments issued by Indian banks to domestic importers to get forex from banks abroad at a cheaper rate.
The RBI issued the directive on Tuesday, about a month after it was discovered that Nirav Modi and Mehul Choksi had misused LoUs issued by PNB to defraud the bank of over $2 billion.
The ban could potentially push up the cost of imports by up to half a percentage point, besides putting foreign banks on an even keel with Indian banks in financing imports, bankers said.
LoU ban may hit cos with longer working capital cycle
This regulation will certainly help global banks that were earlier outpriced by Indian banks, to get back to financing genuine trade finance transactions of Indian corporates and support Indian imports, though withholding tax would add to the cost of the importers,” said Joiel Akilan, ED & chief representative-India of BBVA, one of Europe’s leading banks. The RBI directive is effective immediately. However, “letters of credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with” existing regulations, a notification from RBI said.
A ban on the use of LoUs and LoCs could inconvenience some Indian corporates that have a longer working capital cycle—meaning those companies which take several months to get back the money used in their business by selling their goods, compared to other companies that can recover their money in weeks.
Indian corporates use LoUs to make payments to those companies from which they buy goods to send to India. It is alleged that Modi and Choksi had used LoUs much beyond the limit they were eligible to and finally defaulted on the payments to PNB.
Loan/ debt resolution
The NDTV case
Terming Any Loan Settlement As Criminal Raises Concerns
Private sector bankers say that if NDTV's loan settlement with ICICI Bank is termed criminal, it could hit resolution of bad debts. The concerns follow the Central Bureau of Investigation (CBI) alleging that ICICI Bank officials may have caused wrongful gains to NDTV promoters by agreeing to cut the interest rate to settle the loan.
“Settlement of any stressed loan involves some sacrifice by the banker. Often this is done to protect the loan amount since stand-off might result in loss of the principal well,“ said a banker who didn't want to be identified. If this sacrifice were to be construed as wrongful loss to the bank and a gain to the borrower, loan resolutions would not be possible, he added.
Multinational banks in India have been able to clean up their balance sheet the fastest as they have taken large haircuts in loans that were in default. The government is pushing for settlement of close to Rs 4 lakh crore of bad debt owed by top 50 borrowers which account for over 40% of the banking sector's bad loans.
Banks are likely to make a representation to the government and the RBI through the Indian Banks Association on commercial decisions being questioned. This is the second instance of CBI action against a commercial decision, the first being the arrest of senior officials of IDBI Bank on charges of improper loan sanctioning to Kingfisher Airlines.
The CBI, in a statement on Tuesday , said that the investigation did not pertain to loan default but to the interest relief. “ICICI Bank took the entire shareholding of the promoters in NDTV (nearly 61%) as collateral and then accepted prepayment of the loan by reducing the interest rate from 19% p.a. to nearly 9.5 % p.a. and as a consequence thereof, causing a wrongful loss of Rs 48 crore to ICICI Bank and a corresponding wrongful gain to the promoters of NDTV ,“ the agency said.
In May 2017, the government passed an ordinance authorising the RBI to issue directions to banks to initiate insolvency resolution process under the provisions of Insolvency and Bankruptcy Code (IBC), 2016. This new legislation was aimed at breaking the logjam in the banking industry over banks' inability to resolve over Rs 7 lakh crore of bad loans.
A key feature of this legislation was creation of oversight committees to ratify decision taken by bankers. Having a panel in place is expected to shield bankers from action by investigating agencies who may later look into loan recasts.
However, the government has said that there will not be any blanket protection for bankers. Also proposals have to be referred to the oversight panels by banks.
Banks have no liability for loss of valuables in lockers: RBI
Banks say that "the relationship they have with customers with regard to lockers is that of lessee (landlord) and lessor (tenant)".
In such a relationship, the lessor is responsible for his or her valuables kept in the locker which is owned by the bank.
NEW DELHI: Do not expect any compensation for theft or burglary of valuables in safe deposit boxes of public sector banks as the locker hiring agreement absolves them of all liability.
This bitter truth was disclosed in an RTI response by the Reserve Bank of India (RBI) and 19 PSU banks.
Stung by the revelation, the lawyer who had sought information under the transparency law has now moved the Competition Commission of India (CCI) alleging "cartelisation" and "anti-competitive practices" by the banks in respect of the locker service.
He has informed the CCI that the RTI response from the RBI has said it has not issued any specific direction in this regard or prescribed any parameters to assess the loss suffered by a customer.
Even under the RTI response, all public sectors banks have washed their hands of any responsibility.
According to the information availed by the lawyer, the unanimous reason given by the 19 banks, including Bank of India, Oriental Bank of Commerce, Punjab National Bank, UCO and Canara, among others, is that "the relationship they have with customers with regard to lockers is that of lessee (landlord) and lessor (tenant)".
The banks have contended that in such a relationship, the lessor is responsible for his or her valuables kept in the locker which is owned by the bank.
Some banks, in their locker hiring agreements, have made it clear that any item stored in the locker is at the customer's own risk and he or she may, in their own interest, insure the valuables.
The common feature of all locker hiring agreements states, "As per safe deposit memorandum of hiring locker, the bank will not be responsible for any loss or damage of the contents kept in the safe deposit vault as a result of any act of war or civil disorder or theft or burglary and the contents will be kept by the hirer at his or her sole risk and responsibility.
"While the bank will exercise all such normal precautions, it does not accept any liability or responsibility for any loss or damage whatsoever sustained to items deposited with it. Accordingly, hirers are advised in their own interest to insure any item of value deposited in a safe deposit locker in the bank," they have said.
Aggrieved by the responses, the lawyer — Kush Kalra — raised questions before the CCI — why not just keep the valuables at home after insuring them, instead of paying rent to the bank for a locker when it is not going to take any responsibility for the contents.
He alleged that all these banks, also including State Bank of India, Indian Overseas Bank, Syndicate Bank, Allahabad Bank and others, have formed a "cartel" to indulge in such "anti-competitive" practices.
He further alleged that the bank by forming an association or cartel are "trying to limit the improvement of services which is directly affecting the competition in the market and interests of the consumer".
The lawyer has sought a probe under the Competition Act into the allegation of cartelisation by the banks in respect of the locker service.
2015: Crisis in the Banking sector
The Hindu, February 13, 2016
Banks, it is often said, are the fulcrum of a robust economy. Healthy banks are an essential prerequisite for placing the economy on a higher growth orbit. The banking scene in India, however, presents an absolutely scary picture. A combination of factors ranging from poor credit appraisal to political interference and mismanagement by borrowers have conspired to push the banking industry into a messy cobweb. Bank after bank, especially the government-owned, has come out with poor third-quarter results. The stressed assets (comprising gross non-performing assets plus written-off assets and restructured assets) account for 14.1 per cent of total bank loans as of September 2015, up from 13.6 per cent in March 2015. For public sector banks, the stressed assets were in the vicinity of 17 per cent at the end of September, while the figure for private sector banks stood at 6.7 per cent. The rising stress level, or increase in bad loans, has yielded a twin fallout — of declining profitability at banks and poor credit disbursal. The double effect is already telling on the economy in various ways. For long, banks have either managed to, or rather been allowed to, keep the stress invisible, giving the outside world very little clue as to the happenings inside the industry.
The Reserve Bank of India under Raghuram Rajan’s stewardship, however, has decided to clean up banks’ books rather than letting them camouflage the real picture. “There are two polar approaches to loan stress,” he said at the CII Banking Summit in Mumbai this week. “One is to apply band-aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time, the low growth that precipitated the stress persists. The fresh lending intended to keep the original loan current grows. Facing large and potentially un-payable debt, the promoter loses interest, does little to fix existing problems, and the project goes into further losses.” Indeed, legacy problems should be given a burial, and should not be allowed to persist. So hinting, Dr. Rajan articulated the need for surgical action to retrieve the health of the industry.
Forcing banks to recognise a problem is one thing, and finding a viable long-term solution to it is quite another. That requires not just holistic thinking but an out-of-the-box approach as well, especially in the evolving global context. A meaningful fix can happen only if banks are given functional autonomy at various levels. Restricted freedom inevitably leads to a blame game, making it even more difficult to fix responsibility. The concept of arm’s- length relationship especially needs to be clearly defined and implemented in letter and spirit in the banking industry. It is not just about how much money the Central government will freshly pump into stressed banks. The litmus test for the government lies in its ability, and capacity, to let go of control. The banking system indeed needs a change in the way it is managed.
Loss in scams: 2011-15
Mar 27 2015
In four years, Rs 25 banks lost Rs 12k cr to fraudsters
Twenty-five nationalized banks have lost Rs 12,620 crore to frauds in the last four financial years, according to documents obtained from the finance ministry. Of these, Rs 2,060.75 crore were lost by five banks headquartered in Karnataka alone -Canara Bank, Vijaya Bank, Corporation Bank, Syndicate Bank and State Bank of Mysore. The documents revealed that there have been 4,845 cases of bank frauds over this period. Finance ministry sources said in most cases bank staff either connive with the fraudsters or are negligent.
The latest instance surfaced on Wednesday when the CBI registered a case against an Ahmedabad-based telecom company and its directors following a joint complaint from State Bank of India, Vijaya Bank and Canara Bank. “It is alleged that expressing urgency , the company promoter got Rs 40.4 crore released from the three banks even though some documentation was pending. He disappeared after seeking time until August 31, 2013, to repay the loan,“ the CBI said in a statement.
Among the documents the promoter submitted were letters of credit (LCs), which turned out to be fake. A term loan of Rs 86 crore was also released to this firm, which too was allegedly siphoned off. There is an estimated total loss of Rs 126.4 crore to the banks.
In another case, the CBI on Thursday arrested a former managing director of a Bhopal-based private firm, who was absconding in a case relating to alleged loss of Rs 3.63 crore to State Bank of Indore.He conspired with bank officials to obtain credit facilities on the basis of fake collateral during 2003-2004.
Q4/ 2016: High losses
The Times of India, May 19 2016
PNB Q4 loss highest by an Indian bank
Following a RBI-driven clean-up programme, PNB joins scores of other lenders which have reported losses, including Corporation Bank, which reported a loss of Rs 511 crore for the March quarter. The Delhi-headquartered lender had reported a steep fall in profit during the October-December quarter but had avoided loss that several other players, in cluding Bank of Baroda and Bank of India, registered.With annual loss a shade under Rs 4,000 crore, PNB lags Bank of Baroda, which has been in the red for two straight quarters.
So far in January-March quarter, public sector banks have together reported losses of around Rs 14,000 crore.
On the positive side, there are fewer restructured loans that are turning into NPAs, which are loans that remain unpaid for 90 days. But, banks have to deal with a huge pile of bad debt which doubled to Rs 55,818 crore at the end of March from the level a year ago.
Indian banks have seen their NPAs surge as companies in several sectors such as steel and textiles have witnessed pressure of imports, especially from China. In the infrastructure space, several corporate groups are facing stress as projects have not taken off due to regulatory factors. Although the government has been trying to resolve these cases, there has been limited success. In addition, several companies are still dealing with over-capacity as rural demand remains weak.
Money lost to theft and fraud
Between April 2013 and November 2016, the country's top 51 banks lost Rs 485 crore to theft.
More than 24 lakh people, or roughly 22% of Delhi's population, could have withdrawn Rs 2,000 using this much cash. Documents obtained from the Union finance ministry show that Rs 212 crore was lost to 2,492 cases of robbery , theft and burglary at ATMs. Another Rs 156 crore and Rs 74 crore were lost to credit card and debit card cloning, respectively , while Rs 42 crore was lost to netbanking fraud.
The number of thefts from ATM kiosks has been increasing every year. In 2015-16, 922 cases of theft totalling Rs 78.6 crore were reported, an increase from 698 cases (totalling Rs 51.7 crore) in the previous year.There were 596 cases (totalling Rs 34.34 crore) in 2013-14. The first quarter of 2016-17 has wit nessed 276 cases involving a theft of Rs 48.3 crore.
A major factor for the rising number is that the ecosystem lacks experts to deal with ATM thefts and other cases of technology-related fraud in the financial sector.
“Not all banks have forensic or technology experts.Plus, there is no coordination.Banks must make use of experts from Nasscom and the Centre, while police across the country need to get updated,“ said IPS officer P Harishekaran. Between 2013-14 and the second quarter of 2016-17, there have been 30,259 cases of credit card cloning costing Rs 156 crore. There were 12,033 cases of debit card cloning costing Rs 74 crore in the period.Another Rs 42 crore was lost in 559 cases of netbanking fraud in the same period.
“Police can only conduct post-theft investigation; the onus on prevention is completely on the banks, and there needs to be special risk-management teams and experts working round the clock to protect data,“ cyber expert Mirza Faizan Asad said. Experts also point out that dependence on foreign equipment should be reduced, and the banking sector should procure Indian products to be ensure data safety.
Banks lose Rs 1.6 crore/hour to cheating, forgery
Indian banks lose Rs 1.6 crore to just “cheating and forgery”- one of the eight categories of fraud listed by RBI
Such fraud basically involves obtaining loans using forged documents, or cheating banks by making false claims
Of the Rs 42,226 crore lost to ‘cheating and forgery’, 89 per cent (Rs 37,583 crore) was lost by public sector banks
Every hour, Indian banks lose Rs 1.6 crore to just “cheating and forgery”, one of the oldest methods of frauds which accounts for a little more than 60 per cent of all money lost by banks.
The Reserve Bank of India (RBI) has eight categories of frauds for the sake of uniform reporting by banks, and just one — cheating and forgery— saw Indian banks lose a whopping Rs 42,276 crore in three years of 2014-15, 2015-16 and 2016-17, with Public Sector Banks (PSBs) bearing the brunt. Data for 2017-18 is being compiled.
Experts say this points to a major vulnerability in the system resulting from lack of training, security frameworks and overall hygiene.
Such fraud basically involves obtaining loans using forged documents, or cheating banks by making false claims. Of the Rs 42,226 crore lost to ‘cheating and forgery’, 89 per cent (Rs 37,583 crore) was lost by public sector banks (PSBs), while private banks lost Rs 4,683 crore. The State Bank of India lost the most — Rs 5,743 crore — accounting for 15 per cent of money lost by PSBs.
The money was lost in 7,505 cases and 4,702 cases were reported by PSBs, while private banks saw 2,803 cases. “This kind of fraud, on this scale, cannot take place without insider involvement. Data show these are clearly not stray cases which means the system needs to be evaluated more carefully now,” Tobby Simon of Synergia Foundation, a multi-disciplinary think-tank based in Bengaluru, said. A retired bank official said RBI has clear policies regarding frauds. He, however, claimed it’s unclear how frauds of such magnitude continue to haunt the system.
The money lost to ‘cheating and forgery’ in the three years accounts for 60 per cent of all frauds, which is slightly higher than Rs 70,000 crore. All these are only cases where the fraud involved is more than Rs 1 lakh, and experts say frauds involving money less than Rs 1 lakh could have cost the banks at least another few hundred crores.
2018: The Modi- Choksi scam
Between 29 Jan 2018, when it first came to light, and mid- March 2018, the known size of the Modi- Choksi scam grew fifty times
2005-19: Vis-à-vis new private banks
Every Rupee Invested Lost 23 Paise Till 2019: Survey
In a strong critique of the performance of public sector banks (PSBs), the Economic Survey said while Rs 4.3 lakh crore of taxpayers’ money has gone into PSBs, every rupee invested has lost 23 paise as on 2019. The survey also described Indian banks as suffering ‘dwarfism’, with only one bank in the top 100, while six are needed for an economy like India’s size. PSBs should be asked to share corporate data among themselves through a GSTNlike entity (PSB network) and undertake analytics of the data using fintech. PSB employees should hold stake through Employee Stock Option Scheme across all levels. “Part-ownership of PSBs by employees will reduce agency problems. This is because employees who own shares are incentivised to increase market value of equity.” Assessing the performance of government banks after completion of 50 years of nationalisation in July 2019, the government’s report card on economy said on every performance parameter ‘PSBs are inefficient compared to their peer groups’.
As of January 2020, every rupee of a taxpayer’s money invested in PSB is fetching a market value of Rs 71 paise. As against that every rupee invested in a private bank fetches a market value of Rs 3.7, which is five times of the return in PSBs.
According to the report, if the market-to-book ratio of each PSB becomes equal to that of the second-worst new private bank, the improvement would gain the government Rs 9.1 lakh crore, which is about 8.5 times the disinvestment budget for 2019. Highlighting the importance of banks, the survey said historically the top-five economies have always been supported by their banks. “India becoming a $5-trillion economy will require at least eight Indian banks to be large enough to belong in the top 100 globally.” However, credit growth in PSBs has been sluggish, largely because of their large stock of bad loans. In 2019, PSBs reported gross non-performing assets (NPAs) of Rs 7.4 lakh crore, which is 11.9% of their loans. “NPAs of Indian banks, particularly PSBs, could have been prevented if data and analytics were employed in corporate lending.”
While there have been arguments of the social impact of bank nationalisation, the survey said there have been multiple factors at work. Noting that rural branches have increased 10-fold and credit to rural areas rose 20-fold in the first decade after nationalisation, it said some caution is necessary in interpreting the above trends as being entirely caused by nationalisation. “A key confounder in such an interpretation is the role played by other interventions around bank nationalisation. For instance, the government initiated a green revolution and anti-poverty programmes.” To further confound matters, the RBI had introduced directed lending programmes, which set priority sector targets for banks and the RBI used both formal means and moral suasion to persuade lenders to achieve its targets. Explaining reasons for disproportionate share of bad loans among PSBs, the report card said a plausible explanation could be that in Indian economy’s growth phase between 2004 and 2011, PSU banks grew their loan portfolio but this credit growth was of suspect quality.
On outlook for banks, the survey highlighted the country’s demographics and the Jan Dhan-Aadhaar-Mobile combine as the two big driving forces.
As against the earlier reports that made a push for dilution of government stake, the survey made a strong pitch for employee ownership of PSBs. Even as the Indian Banks Association is negotiating a wage settlement with unions, it said the current flat compensation contracts and pressures from ex-post monitoring by the vigilance agencies, it is hardly surprising that the staff prefer safety and conservatism over risk-taking.
Nationalised and private banks, total bank deposits
19 nationalized lenders' combined m-cap less than HDFC Bank's Rs 2.64L cr
Mayur Shetty The Times of India Feb 03 2015
Investors Lose Interest In PSBs As Bad Loans Rise
The 19 nationalized banks in India account for almost half of the total bank deposits in the country as against private banks, which together have an 18.7% share. However, the surge in bad loans among public sector banks (PSBs) and the technology gap they have vis-à-vis their private peers has resulted in these lenders losing investor interest. As a result, the Rs 2.39 crore combined market capitalization of the nationalized banks is less than the Rs 2.64 lakh crore market capitalization of HDFC Bank the most valuable pri vate lender.
The nationalized banks exclude market leader, SBI which has a market cap of Rs 2.43 lakh crore. But even if the market capitalization of the 19 nationalized banks and the SBI were to be added together, it would still be less than the combined market capitalization of HDFC Bank and ICICI Bank as per Friday's closing prices. In cidentally, SBI is the only public sector lender with a market cap of over Rs 1 lakh crore. The next public sector bank is Bank of Baroda, which is a distant second in the public sector with a market capitalization of Rs 46,985 crore.
While the nationalized banks are being shunned by investors, the new generation private banks have been hit ting new highs on the back of new initiatives, which include digital technology . Besides HDFC Bank and ICICI Bank, two other private lenders have crossed the Rs 1 lakh crore mark. Kotak Mahindra Bank, which has been rallying after its recent inorganic initiatives -acquisition of ING Vysya and a deal to pick up stake in MCX -was worth Rs 1.02 lakh crore on Friday.
What the valuations mean is that the markets are discounting the market share of public sector banks in loans, their real estate assets worth thousands of crores and their customer base which accounts for almost the entire working class population of the country. Analysts say the main reason for despondency in PSU bank stocks is their disproportionate share in bad loans.
Here is what research firm Emkay Global Financial Services said about Bank of Baroda – a better performing public sector bank. “We expect the weak asset quality to persist.
While capitalization is better than peers, weak return ratios coupled with higher Basel III requirement will pose a challenge in the medium term unless there is sharp recovery. Also, capital infusion by the government, if below book value, would contain RoE improvement.”
Most NBFCs don't seek bank licence
Chennai: Several non-banking finance companies, including the Shriram Group, have stayed away from applying for a differentiated banking licence, as a January 1 clarification issued from the RBI forbids both NBFC and bank's co-existence.
The first set of guidelines dated November 27, 2014 for a differentiated bank licence, there was no explicit exclusion for NBFCs to co-exist along with these banks. The only inference was with respect to guidelines which dealt with financial and non-financial activity of the promoters, which was expected to be ring-fenced. These restrictions, according to sources in Shriram Group, vitiates the level-playing field between banks and NBFCs and also between existing banks and new ones, since the existing banks in several promoter groups like HSBC, HDFC, Federal Bank, Kotak are operating their NBFCs.
2014: Deutsche is no. 1
The Times of India Dec 22, 2014
Reeba Zachariah & Boby Kurian
Deutsche Bank has emerged as India's top dealmaker by fees earned during 2014. The European giant grossed $31 million in investment banking revenue, moving up from the fifth position it held in the previous calendar, according to Dealogic data.Wall Street biggie Citigroup retained the second position collecting $27 million in a year when i-banking fees declined nearly 13% from $398 million to $347 million.
Deutsche, which had a good run in equity and debt market deals, has an 8.9% share. Citigroup, ahead in M&A deals, staked claim to 7.7% share of the fee pool. The overall i-banking revenue slipped despite a pickup in the capital market activity as many private investments and certain M&A deals in emerging sectors like consumer internet were struck without advisers.
Standard Chartered Bank, with $25 million and 7.3% share, came third -up from sixth place last time -after advising M&A deals such as United Spirits' divestment of Whyte & Mackay , sale of Neotel by Tata Communications and Wilmar's stake purchase in Shree Renuka Sugars. Credit Suisse and JP Morgan were neck and neck, clocking $20 million in fees with 5.7% share each, while Axis Bank came in sixth with 4.5% share.
The big bankers said the street activity was set for a boost in the New Year. “As in vestment picks up, the requirement for new money and desire to access new capital pools will increase, which could trigger supply of issuances,“ said Amit Bordia, MD & head of corporate finance, Deutsche Bank.
I-banking fee charts are important, and closely monitored, as they usually set the tone for bonus payouts announced in January after the Christmas-New Year holidays. Within the total wallet, debt instruments brought in the highest revenue at $156 million followed by M&A with $112 million and equity capital issuances $78 million.
“2014 saw a pickup in capital market activity, especially qualified institutional placements and M&A transactions, in the latter half. This resulted in a concomitant increase in fee pool, moderated down by the fact that some deals have not had advisers,” said T V Raghunath, MD & CEO, Kotak Investment Banking. M&A and equity market deals increased to $47 billion and $11 billion respectively in the current calendar from $32 billion and nearly $10 billion in 2013.
Debt market deals, however, declined from almost $58 billion to $40 billion. The traditional i-banking fees do not count syndicated lending revenue, in which State Bank of India (SBI) has a lion's share with $83 million in earnings.
But, according to bankers, their bonus payouts were getting de-linked from fees earned in recent years. “Unlike the region, where marquee deals will dictate bonus numbers -no such luck in India. Neither league table rankings nor being one of the top fee generators will have any material effect on year-end numbers, which will be flat to down with the occasional outliers,” said Sourabh Chattopadhyay , partner, Wellesley Partners, a Hong Kong-based recruitment firm focused on financial services sector.
China, for instance, saw its i- banking revenue top $5 billion 2014.
2015: 3 Indian banks in top 5
The Times of India Jan 11 2016
Reeba Zachariah & Boby Kurian
The merger advisory units of Axis Bank, Kotak Mahindra Bank and ICICI Bank have made it to the list of top five dealmakers by fees earned during 2015, a Dealogic report has revealed. This marks the return of Indian tigers, overtaken by American and European investment banks since mid-2000s.
Axis rose from No. 4 in 2014 to No. 2, grossing $25 million in investment banking revenue and garnering nearly 8% of the total fee pool last year. Kotak Mahindra, which didn't even figure in the top 10 list of 2014, came third with earnings of $17 million. ICICI, with $15 million in revenue, moved three ranks up from 2014 to bag the fifth spot last year.
JM Financial had topped Bloomberg's merger and acquisition (M&A) chart by the size of the deals advised during the previous calendar year.
The investment banking revenue compiled by Dealogic comprises fees earned from M&A advisory , debt deals and equity transactions. Despite the strong showing by domestic dealmakers, Citigroup earned most fees, which was pegged at $32 million last year. Citi, with 10% share of the fee pool, was active in technology and consumer internet deals as startups gathered heft and deals got bigger, attracting the attention of foreign investment banks.
The total wallet of India's investment banking industry shrunk to $329 million last calendar compared to $408 million in 2014. M&A brought the highest revenue of $137 million, followed by $100 million fetched by debt deals and $92 million by equity issuances.
“Domestic banks have far superior execution capabilities and ear to the ground, reflecting on the performance of every deal this year and have hence beaten foreign banks,“ said Dharmesh Mehta, MD & CEO, Axis Capital, the M&A advisory arm of Axis Bank.
Besides Citi, the only other foreign bank in the top five list was JP Morgan, which jumped from the sixth position in 2014 to the fourth, garnering $15 million in fees last year. 2014's topper Deutsche Bank tumbled to the eighth position.
Sourabh Chattopadhyay , country head, Wellesley Partners, a Hong Kong-based placement firm focused on the financial services industry , said, “The underlying stories from last year's performance by foreign banks include Citigroup's re-emergence to the top, the continuing capital market success of Morgan Stanley and Credit Suisse's performance despite losing key senior members. There is measured optimism for 2016 as selective upgrading has picked up“.
The ownership structure in private banks/ 2017
At a time when PSU banks in India need about Rs 2 lakh crore for recapitalisation to tackle rising nonperforming assets (NPAs), Kotak Bank alone may sell shares worth a similar amount. This is because the RBI has asked promoters Uday Kotak and family to cut their stake from the current level of 32% in the country's third largest private sector lender to 15% by March 2020.
The Rs 2-lakh-crore amount is more than the current market cap of ICICI Bank, which is the third largest bank in the country after HDFC Bank and SBI respectively . It is also more than the market cap of eight top PSU banks (except SBI) put together.
A report by proxy advisory firm SES pointed out that given the situation at Kotak Bank, it's high time the banking regula tor looks at ownership structure in private banks. Otherwise, like ICICI Bank and HDFC Bank, foreign funds will hold a majority in Kotak Bank also.
If the bank issues shares to dilute the promoters' stake to the level stipulated by the RBI, it would need to issue about 210 crore shares over the next three years, but the same should be done in tranches. The report said that if the bank increases the share price by 5% in each tranche it sells, the total funds required would be about Rs 2.20 lakh crore.
“After such an issue, the bank will have the highest net worth in the country's banking system and will lose its sheen unless it grows by leaps and bounds and overtakes leaders like SBI and HDFC Bank in terms of business, which does not appear to be a practical target,“ it noted. “Therefore, such a step will cause performance metrics to become weak and at the end not only both investors and promoters will lose, but all stakeholders will lose as the bank will not be the same as it is today ,“ it said.
The report also pointed out that it's only the foreign funds that can have the money power to buy such large chunks of shares and, hence, their share in Kotak Bank is sure to rise. Currently , foreign funds hold 42.1% in HDFC Bank, while they hold nearly 47% in ICICI Bank and almost 39% in Kotak Bank.
Market capitalization/ Valuation of India’s leading banks, 2018
2018: M-cap vis-à-vis income
Market capitalization vs. the total income of India’s five leading banks, as in April 2018.
See graphic, ' The Government’s shareholding in public sector banks/ As in 2018 '
The number of branches operated by PSU banks, 2006> 2019
Foreign, private, PSU banks
The Market share of Foreign, private, PSU banks in India in 2018, 19.
Bank mergers in India, 1993-2019
2019/ 10 PSBs merged to 4; 27 PSBs reshaped into 12
Big bank theory: 10 PSBs merged to form 4 biggies
27 Govt Banks In 2017 Have Been Reshaped Into 12
Fifty years after bank nationalisation, the Centre on Friday announced the biggest overhaul in the public sector space with finance minister Nirmala Sitharaman unveiling a plan to merge 10 state-run lenders to form four large entities, capable of meeting the higher funding requirements of the economy and acquiring global scale.
Following the consolidation, the country will have 12 public sector banks, instead of 18 at present, with the merged entity comprising Punjab National Bank, Oriental Bank of Commerce and United Bank of India becoming the second largest lender after SBI. However, it will be about onethird the size of SBI, which hovers around the 50th spot among global banks by assets.
The merger of Canara Bank and Syndicate Bank will create the fifth largest lender, based on business at the end of March 2019. In 2017, there were 27 PSBs, including IDBI, where LIC is now majority shareholder. “Twelve well-consolidated, energised, adequately capital endowed banks will operate... Banks with strong national presence and global reach is what we want,” the FM said.
Banks told to ensure no disruption in activities
She also announced the contours of a Rs 55,000-crore recapitalisation plan for the entities that are to be merged as well as the six — Bank of India, Central Bank, Punjab & Sind Bank, Indian Overseas Bank, Bank of Maharashtra and Uco Bank — which are not part of the consolidation plan.
Sitharaman’s second announcement in as many weeks comes at a time when the economy has slumped to its slowest pace in 25 quarters, prompting the government to unleash measures to speed up economic activity.
While bank consolidation has been on the agenda for over a decade, governments had dithered on moving ahead with it, fearing a backlash from the unions, which have lost teeth in recent years. Since coming to power five years ago, the Modi administration completed the merger of SBI associates with the parent, while merging Bank of Baroda, Dena Bank and Vijaya Bank earlier this year to create what is current the country’s second largest public sector bank.
The entire exercise was delayed as the state-run banks had seen massive loan impairment due to corporate defaults, pushing several of them into losses. While there were only four profitable public sector banks in the fourth quarter of 2018-19, 14 are now in the black.
While announcing the biggest amalgamation exercise so far, the government said banks have been asked to ensure that there is no disruption of banking activity and loan flow to the economy is not impacted. “This is exactly the right time to do it. It will not cause any disruption, we will draw upon the experience of the BoB merger,” finance secretary Rajiv Kumar said.
He also assured employees that there will be no retrenchment post-merger. Bankers, however, fear that they may be transferred to another part of the country as branch rationalisation is a certainty given that several urban centres have several branches at the same location.
Brief histories of the merging banks
While the big bang merger will bring in much needed economies of scale in the operations of some of the smaller banks, it will also result in erasing the identity of six banks, some of which are more than a century old.
The oldest is Kolkata-based Allahabad Bank, which is also the oldest joint stock company in India. Unlike other nationalised banks which happened to have Indian promoters, this institution was founded in Allahabad by a group of Europeans in 1865. In 1920, the bank was acquired by P&O Banking Corporation and relocated to Kolkata. Its ownership moved into Indian hands before nationalisation.
Like the bank it is merging into (PNB), Oriental Bank of Commerce was established in Lahore a few years before Independence in 1943 by a businessman, Rai Bahadur Lala Sohan Lal. In 1945, the bank was acquired by the Thapar Group. Two years later, following Partition, the bank’s head office was shifted from Lahore to Amritsar. It then relocated to New Delhi in 1951. The bank was nationalised in 1980.
United Bank of India, too, had its origins outside the borders of present day India. UBI was formed by the merger in 1950 of four banks of British Bengal. The banks were Comilla Banking Corporation (founded by N C Dutta in 1914 in present day Bangladesh), Bengal Central Bank (set up by J C Das in 1918), Comilla Union Bank and Hooghly Bank.
Syndicate Bank was founded in 1925 in Udupi in coastal Karnataka as Canara Industrial and Banking Syndicate by Upendra Ananth Pai, a businessman, Vaman Kudva, an engineer, and Dr T M A Pai, a physician. The bank was founded in the same district as three other nationalised banks — Canara Bank, Corporation Bank and Vijaya Bank.
Corporation Bank, which will merge into Union Bank, was founded in Udupi by Haji Abdullah Haji Kasim Saheb Bahadur in 1906. However, after a decade, the bank’s operations were handled by businessmen from the Goud Saraswat Brahmin community. Incidentally, Syndicate and Canara Bank were also set up by members of the same community.
Andhra Bank was bor n out of the nationalistic movement during the freedom struggle. The bank was founded in 1923 in Machilipatnam, a port town in coastal Andhra Pradesh, by Bhogaraju Pattabhi Sitaramaiah. Bank of Baroda, which acquired Vijaya Bank and Dena Bank, had announced last month that in order to preserve the rich heritage of all the three brands, museums are being planned at heritage sites to showcase the history of the entities.
PSB headquarters in Kolkata reduced to 1
During the pre-Independence era, there had been more bank headquarters in Kolkata than any other Indian city, except Mumbai. Now Kolkata could soon be left with just one HQ of a state-run lender — UCO Bank. Following Friday’s announcement of big ticket bank mergers, the capital of West Bengal is most likely to lose the headquarters of two state-run banks — United Bank of India (UBI) and Allahabad Bank.
Way back in 1923, Allahabad Bank had shifted its headquarters from Allahabad to Kolkata, the then capital of United Bengal. The bank was formed in 1865 but its operations were shifted to Kolkata because, at that point of time, Mumbai and Calcutta (as this city was known earlier) were the two financial capitals of British India. UBI was formed in 1950 with the merger of 14 private banks before it was nationalised in 1969. The bank was originally formed with the amalgamation of four banks — Comilla Banking Corporation (1914), Bengal Central Bank (1918), Comilla Union Bank (1922) and Hooghly Bank (1932).
Imperial Bank, the predecessor of State Bank of India (SBI), too, was based out of Kolkata.
A top official of Allahabad Bank told TOI on Friday that Indian Bank would be the anchor bank as far as merger of Allahabad Bank is concerned. As a result, the main decision-making may be shifted to Chennai.
However, in recent years, Kolkata has gained its first HQ of a private sector lender — the newbie, Bandhan Bank.
How the banks were merged
For the last six months or so, officials in the department of financial services and the public sector bank brass had been brainstorming to move ahead with the long-pending consolidation plan. But it was not until Friday afternoon that even the bank chiefs were informed about the combinations that had been worked out by the government.
Finally, it was technology that settled the issue for at least four banks — Canara and Syndicate and Indian Bank and Allahabad. While Canara and Syndicate Bank were on the iFlex core banking system, Indian and Allahabad banks used BaNCS, prompting the finance ministry to go for these alliances for a smooth merger.
That left the government with the option to merge six entities that were on the Finnacle CBS platform into one, to create a mega entity, which it realised would be tough to manage. So, it opted to merge three entities each. But even here, there were several calculations at work, including political considerations.
While the government decided to bite the bullet on the banks headquartered in Kolkata, when it came to Bank of Maharashtra, the state elections were a factor that came into play in leaving it untouched, at least for the time being. It may have been a reason for leaving Bank of India and Central Bank of India to operate on a standalone basis, sources indicated. The attachment of the Sikh community to Punjab & Sind Bank meant that the government did not want to push its consolidation and retain the identity of the lender, where the unwritten rule is to have a Sikh chairman or managing director.
But when it came to the six that had to be merged, various permutations and combinations were used to decide on the exact combinations. So, United Bank of India’s strong current and savings bank account (CASA) base of 51% against Oriental Bank of Commerce’s 29% meant that they could complement each other. Similarly, there were geographical considerations too. Punjab National Bank and OBC had a strong presence in the North but were largely missing from the East and the Northeast, where United Bank is deeply entrenched.
PNB’s return to profit paved the way for it to play the anchor in one of the merged entities. In the previous round, Bank of Baroda was asked to take the lead as PNB was bleeding due to a massive NPA pile and the fraud orchestrated by Nirav Modi and Mehul Choksi.
In case of the other threeway merger involving Union Bank, Andhra Bank and Corporation Bank, there are several synergies at work.
Micro-Finance Institutions ( MFI )
Indira Gandhi's nationalisation of 14 private banks in 1969 placed 85 per cent of the country's bank deposits under the government's control, and signalled its lurch to the left. Ostensibly, the move would take credit and banking facilities to the poor, especially in rural areas. No such revolution came about. Instead, we watched government banks accumulate a vast pile of 'non-performing assets', or bad loans, advanced to large industrialists, typified by Vijay Mallya. Meanwhile, entrepreneurs rooted in rural reality recognised that there was a need for credit in our villages and slums, which would require new paradigms of lending. Learning from experiences in Bangladesh, Thailand and the Americas, a star IIM-Ahmedabad alumnus, Vijay Mahajan, was the first to set up a micro-finance institution (MFI), in 1996. Popularly known as BASIX, the Hyderabad-based finance corporation received extensive support from Indian bankers, industrialists and foreign funders. By 2010, BASIX had a loan book of Rs 1,800 crore, and was seen as a model for credit to the poor. Following in its footsteps, and also based in Andhra Pradesh, SKS Microfinance was floated as a publicly listed company, and the consequent access to funds fuelled its meteoric growth.
By 2010, Indian MFIs had bank finance worth Rs 30,000 crore, and Andhra Pradesh was by far the most active locus of their operations. This high visibility made the industry a political football, and in 2010, the Congress chief minister, K. Rosaiah, promulgated laws that severely curtailed MFI operations, alleging malpractices in lending and collection. The ousted chief minister, Chandrababu Naidu, proclaimed that these measures were inadequate, and loans from MFIs should be waived. Borrowers figured they had political sanction to stop repaying loans, and the consequent cash squeeze pushed the industry to the wall. BASIX crumbled, and SKS went into a protracted crisis, leading to the ouster of its founder, Vikram Akula. Meanwhile, another MFI, Bandhan, had grown out of West Bengal, and had relatively little exposure to south Indian markets. Led by Chandra Shekhar Ghosh, a man of humble origins, Bandhan was established in 2002. Every year, it set itself rolling three-year targets, and every year, it exceeded them. By 2005, it was far-sighted, and confident, enough to bring in Deloitte to audit its systems. In 2007, Forbes rated Bandhan as the second most successful MFI in the world. Unroiled by the MFI debacle of 2010-11, Bandhan gathered momentum in this decade, and by August 2015, had 6.7 million borrowers, and a loan book of Rs 10,500 crore. In that month, it became the first of the Indian MFIs to receive a banking licence. Within a year of beginning operations, Bandhan Bank has issued 8.1 million debit card cards, significantly more than much older banks such as Kotak Mahindra and Yes Bank. Clearly, Bandhan has a dynamic DNA. In the book named for it, veteran journalist Tamal Bandyopadhyay traces Bandhan's growth under the restless Ghosh, and explores the unusual man who still runs it. It is a compelling story, of a man with an acute sensitivity to the poor, and the ability to drive high growth at a low cost. Though exceedingly well-researched, full of both context and detail, Bandhan often frustrates the reader, repeating facts and data points, flipping back and forth in time and theme. With skilled editing, it could have made a highly relevant story into a much more absorbing one.
‘Unreasonable fee for breach of minimum balance’
Ashish Das is a professor of statistics with the Indian Institute of Technology Bombay, Mumbai.
An IIT-Mumbai professor's study has revealed that banks impose unreasonable charges for failing to maintain minimum balances
The data suggests Indian Overseas Bank imposes annual charge of 159.48 per cent on shortfall in minimum balance, followed by Yes Bank, HDFC Bank and Axis Bank
Public sector as well as private banks have been imposing unreasonable charges on customers for failing to maintain minimum balances in their savings accounts, a study by an IIT-Mumbai professor has claimed.
The study, by Ashish Das, showed that some banks like Yes Bank and Indian Overseas Bank have been imposing penal charges of over 100 per cent per annum on shortfall in maintenance of minimum balance in customers accounts. The Reserve Bank guidelines mandate that charges for non maintenance of minimum balance in savings bank accounts be "reasonable and not out of line with the average cost of providing the services".
According to the study: "With many banks charging at an average high rate of 78 per cent per annum of the shortfall amount, it makes the whole regulation of reasonableness of charges as per cost quite shallow".
As per the data provided by Das, Indian Overseas Bank imposes annual charge of 159.48 per cent on shortfall in minimum balance. Yes Bank charges 112.8 per cent, followed by HDFC Bank (83.76 per cent) and Axis Bank (82.2 per cent).
The largest lender SBI charges 24.96 per cent penalty, says the study.
The minimum balance requirement in different banks range from Rs 2,500 to Rs 1 lakh. The RBI, the study said has formulated the penal charges rule with an objective of bringing in fairness from the customers' angle. "Thus, it is time to plug the regulatory and supervisory gaps in a holistic manner and formulate clear guidelines on the formation of slabs and how to measure reasonableness of charges based on costs of funds," it said.
SBI slashes fine for not keeping min balance
Move Expected To Help 25 Crore Account Holders
In a move that will benefit 25 crore account holders, State Bank of India (SBI) has reduced charges for non-maintenance of average monthly balance (AMB) in savings accounts by more than 70%. The revised charges will be effective from April 1, 2018.
The charges for nonmaintenance of AMB for customers in metro and urban centres have been reduced from a maximum of Rs 50 per month plus goods and services tax (GST) to Rs 15 plus GST. For semi-urban and rural centres, the charges have been reduced from Rs 40 each month plus GST to Rs 12 and Rs 10 plus GST, respectively.
“We have reduced these charges taking into account the feedbacks and sentiments of our customers. SBI also offers its customers options to shift from regular savings bank account to basic savings account on which no charges are levied,” the bank said.
SBI had faced a lot of flak after it came to light that it earned more from minimum balance penalties than its profits (which were contained because of bad loan provisions). Also, many students and underprivileged customers lost their balances because of wrongful classification of their accounts as regular savings accounts.
SBI has 41 crore savings bank accounts, out of which 16 crore accounts are either under Pradhan Mantri Jan-Dhan Yojana or basic savings bank accounts. Both these do not have minimum balance requirements.
Additionally, pensioner/minor/social security benefit holder accounts were already exempted. Also, students up to the age of 21 years are exempted. So the latest revision in AMB will benefit 25 crore customers.
Meanwhile, a news agency report said that SBI had closed more than 41 lakh savings accounts between April and January in the current fiscal year for not maintaining AMB. Last April, the nation’s largest lender had re-introduced the penal charges on non-maintenance of AMB after a gap of five years. Later in October, it had revised down the charges to some extent, followed by the latest decision to reduce these further on Tuesday.
“Due to provisions of penalty on non-maintenance of minimum balance, the bank has closed 41 lakh savings bank accounts between April 1, 2017 and January 31, 2018,” the bank replied to an RTI query filed by Chandra Shekhar Gaud from Neemuch in Madhya Pradesh.
Banks that quit India
For decades, multinational banks have sought to tap the continent-sized Indian market. Unlike other multinational entities, banks are not able to sweep the market as authorities in India and elsewhere grant branch licences very judiciously.
Yet, over half a dozen multinational banks have pumped in billions of dollars to grow their retail business across India, only to sell them and exit in the last two decades (see graphic). It started with ANZ Grindlays, then the largest foreign bank in India. ANZ Grindlays, which was to banking what Hindustan Lever was to FMCG, sold its business to StanChart and exited the country in 2000.
A few years later in 2007, ABN Amro, which had acquired Bank of America’s retail business in 1998, sold out to RBS following a global deal. In the last decade, Deutsche Bank, ING, RBS and HSBC sold significant portions of their retail businesses in the country. While ANZ Grindlays did take a major hit because of the securities scam, most of the others had a profitable business.
So, what is it that makes foreign banks exit after investing? According to veteran banker-turned-entrepreneur Gunit Chaddha, who started in Citibank, it is to do with the nature of the business. Chadha has had a ringside view of multinational banks in global markets as former CEO of Deutsche Bank Asia.
“In my view, unlike investment banking or capital markets which are truly global businesses, retail banking is a home market or, at best, a multi-country business. The exception being credit cards and wealth management, both of which can be global businesses. In most countries, the top 5 retail players are the local banks with multinationals playing for the number 5 to number 10 position in retail banking market share,” said Chadha, founder of APAC Financial.
Echoing this view is Amrish Rau, CEO of Pine Labs and a veteran of the credit card business. According to Rau, the concept of a massive global consumer bank is dead. “With the rise of the fintechs, banks are realising that they have to make large investments in newer technology to retain their customers. At the same time, they are under higher scrutiny and facing increased regulations while the capital available is the same. This is compelling banks to spend more in defending their business in domestic markets.”
Chadha says that regulation has not been a factor in any of the exits so far. “Most of the foreign banks operating in India have had very profitable businesses over a long period, which shows that regulations are well-balanced and supportive to global banks, as much as to local banks,” he said.
National electronic funds transfer (NEFT)
Transactions through the National electronic funds transfer (NEFT) system, 2009-19
2007-18, infusion of govt. funds; 2010-18: losses
Nationalised banks, 2010-18:
infusion of govt. funds;
Losses poted by public sector banks.
Taxpayer Foots Bill As Bad Debt, Frauds Hit PSBs
Every year, finance ministers face twin challenges — meeting spending requirements, especially to improve social sector schemes, while keeping an eye on the deficit given that tax collections are insufficient. In recent years, they have had to tackle another pressure — the need to keep pumping money into public sector banks, which have been grappling with a record pile of bad debt and corporate fraud.
Over 11years, three finance ministers — Pranab Mukhjeree, P Chidambaram and Arun Jaitley — pumped close to Rs 2.6 lakh crore into government-run entities with their requirement for funds rising steadily as more skeletons keep tumbling out. The amount is more than the highest estimate of notional loss from the 2G scam that the CAG had put out. It is more than twice the Centre’s allocation for rural development for the current year and three-anda half-times the outlay for the roads ministry.
Keeping aside the Rs 1.45 lakh crore earmarked for recapitalisation by the Centre during the current and the next financial year, the banks received close to Rs 1.15 lakh crore equity from 2010-11 to 2016-17. During this period, their profits added up to Rs 1.8 lakh crore, with SBI and other nationalised banks reporting combined losses during the last two financial years as they set aside more funds to deal with potential losses from bad debt, or non-performing assets.
This year is expected to be no different with SBI, the country’s largest lender, reporting its first quarterly loss in 18 years, and others, such as Bank of Baroda, too, faring poorly. “It does appear that the worst may not yet be over for PSBs with regard to NPAs and March 2018 will be the next touch point that will provide further guidance,” ratings agency Care concluded recently.
Losses hit return on equity of public sector banks
Not surprisingly, losses have impacted the return on equity or the capital of public sector players. Against an ROE of a shade under 12% for private lenders, SBI group offered -0.7%, and the score for other nationalised banks was even worse at -2.8% in 2016-17, RBI data showed.
While the state run-lenders accounted for around 70% of the banking business, their share of funds set aside for NPAs was estimated at over 80% in 2016-17 — an improvement from 87% in the previous year.
The public sector players fare poorly on other counts too. For instance, in 2016-17, RBI estimated wage bill added up to 8.7% of the income of private banks, much lower than the 12.7% for the SBI group and 10.7% for nationalised banks.
As a result, chief economic adviser Arvind Subramanian’s call for private participation in these banks will appeal to many taxpayers as well as policymakers, who believe that bankers have been careless in lending. But a part of the problem is self-afflicted as, first the Congress-led UPA and now the BJP regime have opted to maintain majority state control in these banks, trashing the Vajpayee government’s attempt to lower Centre’s holding to 33%.
On their part, public sector bankers believe that they are hobbled by unnecessary bureaucratic restrictions, ranging from limited flexibility due to oversight by agencies such as the CAG and the Central Vigilance Commission that private players don’t have to deal with. Similarly, state-run players have to disburse credit under various government schemes such as Mudra or restructure loans for SMEs or even large corporates, as was the case after the 2008 financial crisis.
Infusions: 2010-19; history
In the 50 years since banks were nationalised, the recapitalisation bill from FY18 to FY20 at Rs 2.69 lakh crore has been higher than in the first 45 years — estimated to be less than Rs 1.5 lakh crore. In the last 10 years, the government has been consistently capitalising public sector banks (PSBs) with Rs 3.8 lakh crore between FY11 and FY20. This does not include the Rs 20,000-odd crore that Life Insurance Corporation has paid for acquiring 51% stake in IDBI Bank.
The government has been forced to infuse funds after PSU banks reported collective losses from FY16 to FY19 totalling Rs 1,64,474 crore. These losses put pressure on government finances at multiple levels as the Centre lost out on dividends and tax revenue.
While the bulk of the capital infusion came under the NDA II government, the maximum number of bankdelivered social schemes were also announced under this regime. These include Jan-Dhan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Atal Pension Yojana.
Although banks were first nationalised in July 1969 with a second round of nationalisation in 1980, the capital requirement was felt only in the mid-90s. Liberalisation of the economy and financial sector reforms resulted in the RBI adopting global prudential norms for banks.
As a result, immediately after reforms in 1992-93, the profitability of the PSBs as a group turned negative with 12 nationalised banks reporting net losses. Besides recognising bad loans (which triggered the losses), the RBI has also set a deadline of March 1996 for attaining a capital adequacy ratio of 85. With eight banks missing the deadline, the Centre was forced to infuse capital.
After the financial sector reforms, the government ended up spending Rs 20,446 crore in bank capitalisation in the 1990s to enable them to meet global capital standards. The subsequent decade saw banks being net contributors to the government as easing interest rates, capital-raising through listings and a growing economy helped PSBs book record profits.
The latest round of recapitalisation has been triggered by former RBI governor Urjit Patel’s move to clean up PSU banks by scrapping all loan-restructuring schemes and forcing banks to recognise stressed loans as default. However, despite recapitalisation, banks have been losing marketshare to private banks. This is reflected in the market cap of PSU banks, which is only Rs 6 lakh crore as against Rs 17.16 lakh crore for private banks.
In 2014, the RBI had appointed a committee headed by former Axis Bank chairman P J Nayak to review governance of boards of banks in India. The Nayak committee had pointed out that — given the lower productivity, steep erosion in asset quality and demonstrated uncompetitiveness of PSBs over varying time periods — the recapitalisation of these banks will impose significant fiscal costs. The committee had said that unless the governance of PSBs improves, it would impede fiscal consolidation, affect fiscal stability and eventually impinge on the government’s solvency.
2017: 6 stressed banks get ₹ 7,500 cr capital
The government has provided over Rs 7,500-crore fresh equity to six stressed state-run banks to help them meet the prescribed regulatory capital requirement and state its commitment to keep banks well-funded.
Bank of India, IDBI Bank, Uco Bank, Bank of Maharashtra, Dena Bank and Central Bank of India have received equity through preferential issue of shares with two of them informing stock exchanges about the decision.
When contacted, financial services secretary Rajiv Kumar confirmed the development. “Banks will not suffer due to shortage of regulatory capital. But we will monitor their functioning to ensure that they undertake clean, responsible and prudent business to enhance stakeholder value,” he told TOI.
The details of the monitoring plan are expected to be announced shortly. While announcing a mega Rs 2.11-lakh-crore recapitalisation plan, finance minister Arun Jaitley had said strict conditions will be put in place to avoid a repeat of unbridled lending that has resulted in record non-performing assets (NPAs) for Indian banks, especially those in the public sector. At the same time, it is working on an incentivising the better performers.
The six banks are on the list of players that are part of prompt corrective action initiated against state-run lenders whose performance has slipped due to a pile-up of bad debt.
While the government decides the mode for recapitalisation of all state-run banks, it advanced the release of funds to these six to help them meet their equity requirements and enable them to resume normal business.
Uco Bank informed the stock exchanges that on Thursday, the finance ministry communicated its sanction for release of Rs 1,375 crore towards preferential allotment of equity shares. Similarly, IDBI Bank has received Rs 2,729 crore. In the Union Budget, the government had budgeted for Rs 10,000 crore for recapitalisation of public sector banks but, given the increase in NPAs, the allocation is set to be enhanced in the next Budget.
2017-18: Losses and NPAs
i) Losses in 2017-18; ii) NPAs in 2017-18;
Gross NPAs, 2013-18
Muslim-cap and fund infusion
The government (including LIC) has pumped Rs 5.9 lakh crore into public sector banks (PSBs) since FY14 with additional Rs 70,000 crore planned in FY20. However, its benefit has been modest. Most PSBs have shrunk their credit portfolio and reported cumulative losses over FY14-FY19. The current market value of government stake is significantly lower than the capital infused. Here's a look.
Non-performing assets (NPAs)
Sub-sectors with the most, least stressed advances: 2016-18
Sub-sectors with the most, least stressed advances: 2016-18
2013- 2018: Gross NPAs of Indian banks
NPAs doubled after RBI made classification of NPA norms stricter- The graph shows Gross NPA- 2013-18
Indian banks’ NPAs, 2013-19
2014-18: Advances, NPAs; 2018: recoveries
Banks Recover ₹60,713Cr In First Half Of 2018-19
Public sector banks reported recovery of Rs 60,713 crore against non-performing assets (NPAs) in the first half of the current year, which is double of the amount recovered in the corresponding period last year and more significant returns on highvalue accounts are expected, the government has said.
In response to a parliamentary question, the finance ministry said following amendments to the Banking Regulation Act, the Reserve Bank of India directed banks to initiate insolvency proceedings before the National Company Law Tribunal in 41 cases, 12 of which had cumulative outstanding of Rs 1,97,769 crore as on March 31, 2017. The remaining 29 had an outstanding of Rs 1,35,846 crore as on June 30, 2017.
“As per RBI data on global operations (with provisional data for September 2018), during the last three and a half financial years, NPAs of scheduled commercial banks reduced by Rs 2,83,770 crore due to recoveries,” the government told BJP MPs Kirti Azad and Bharatiben Shiyal.
The government said measures such an asset quality review (AQR) initiated in 2015 for clean and fully provisioned balance sheets revealed a high incidence of NPAs that were piling up since 2008 — a period when UPA was in office. “As per RBI inputs, primary reasons for spurt in stressed assets is aggressive lending practices, wilful default, loan frauds, corruption in some cases and an economic slowdown,” it added.
The AQR enforced by the Modi government led to stressed accounts being reclassified as NPAs and expected losses were provided for. The transparent recognition of stressed assets led to gross NPAs of scheduled commercial banks increasing from Rs 2,51,054 crore as on March 31, 2014 to Rs 3,09,399 crore on March 31, 2015; Rs 5,66,247 crore on March 31, 2016; Rs 7,28,740 crore on March 31, 2017 and Rs 9,62,621 crore on March 31, 2018. This provisionally declined to Rs 9,46,062 on September 30, 2018.
The government said rise in NPAs was in good part due to banks being made to recognise stressed assets as NPAs and the withdrawal of restructuring schemes in 2017-18. This led to an honest appraisal of the state of bank finances and the role played by indiscreet and risky lending in the past.
With the adoption of a ‘creditor-in-saddle’ approach under the Insolvency and Bankruptcy Code, and interim resolution professionals taking over management of a corporate debtor at the outset, the incentive to abuse the legal system has been taken away, the finance ministry said.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has been amended to make it more effective with a threemonth jail term for a borrower who does not provide asset details and for the lender to get possession of mortgaged property in 30 days.
Public sector banks have created stressed asset verticals for stringent recovery, set our protocols for pre and post sanction and close monitoring of large value accounts.
Companies with a credit exposure of ₹5 crore or above and categorized as NPAs, 2015-2021
2015: NPAs in India, major economies
Desi Banks Join League Of PIIGS Where Spain Has Lower Ratio
The 9.85% ratio of bad loans in banks has put India in the group of those nations that have very high nonperforming assets (NPAs). The only major countries with similar ratios are the troubled EU nations: Portugal, Italy, Ireland, Greece and Spain — commonly referred to as PIIGS.
According to a research report by ratings agency CARE, India’s NPA ratio — which excludes restructured assets that are around 2% higher than NPA — is one of the highest in the group of ‘high-NPA’ nations. The only countries with a higher NPA than India are Portugal, Italy, Ireland and Greece. Even among the troubled PIIGS, Spain has a lesser ratio of bad loans compared to India.
CARE chief economist Madan Sabnavis said in the report, “The seriousness of the NPA problem can be gauged by the absolute level of impaired assets in the system. Ever since the RBI had spoken of asset quality recognition (AQR) in 2015, there was an increase in the pace of recognising these assets. For the European nations, the bad loans are more of a legacy problem whereas for us it is something that got recognised only two years back.”
Indian banks started recognising stressed loans as NPAs only after former RBI governor Raghuram Rajan introduced asset quality recognition norms forcing banks to classify stressed borrowers as defaulters. According to Sabnavis, the NPAs have created a twin problem. First, they have rendered banks short of capital and, second, they have reduced banks’ capacity to lend for large long-term projects, which is why most public sector banks are now focusing on retail.
The report classifies major economies into four blocks — very low NPA, low NPAs, medium level NPA and high NPAs. The countries with very low level of bad loans are Australia, UK, Hong Kong, Canada and South Korea. Within the emerging market economies, China, Argentina and Chile had low ratios of 1-2%. According to economists, while the bad loan problem in India is serious, the economy has the advantage of being a higher growth economy, which puts it in a better position related to the other high-NPA countries in Europe.
2016: NPAs in India, major economies
In 2016, in just one year, India made rapid progress in the ranks of major nations with bad loans, rising rapidly from no.5 to no.3.
2016: 16 banks breach the threshold
Sixteen banks have net non-performing asset (NPA) ratios that breach the thresholds which place them on RBI's watch list under the prompt corrective action (PCA) plan. If they do not improve their net NPA ratios in the March 2017 results, the central bank will place restrictions on activities. One bank has breached the thresholds set for return on assets. However, on tier-1 capital, most banks are within the regulatory requirement.
NPAs in 2016, 2017
Guv Seeks Amendments For More Teeth To Monitor PSBs
The Reserve Bank of India (RBI) put the blame of the $2-billion Nirav Modi-Mehul Choksi fraud on Punjab National Bank (PNB), including its board, and accused the state-run lender of furnishing “factually incorrect” compliance reports. The RBI also defended its supervision on the grounds that the onus was on lenders and it was not possible for the central bank to audit over one lakh bank branches in the country.
“As regards the LoUs (letters of undertaking) issued for years without collateral by the PNB branch (in Mumbai) which went unnoticed, it is pertinent to recognise that primary responsibility of understanding the risks undertaken by a bank and ensuring that the risks are appropriately managed through necessary risk mitigants, controls, etc, clearly rests with the board directors of the bank concerned,” the regulator told a Parliamentary Standing Committee when RBI governor Urjit Patel appeared.
At the same time, it demanded fresh powers, arguing that the laws needed to be amended to give the regulator more teeth in supervising state-run banks.
The RBI contended that SBI and other nationalised banks were not “banking companies” defined by the Banking Regulation Act and they were governed by other laws. It then listed nine powers that it lacked, including the mandate to appoint and remove public sector bank chiefs, license them, convene a meeting of their boards or supersede the board. Further, the RBI said it did not have powers to order voluntary amalgamation or winding up or seek the Centre’s help for suspension of a state-run bank’s business and preparation of a restructuring plan.
The statement is expected to set the stage for a fresh battle with the finance ministry, which had questioned similar claims made by Patel earlier. Finance ministry officials have maintained that it only had powers to appoint and remove bank chiefs, which was also done in consultation with the Banks Board Bureau and the RBI.
In its submission to the Parliamentary panel, the RBI said it has suggested amendments to the law to empower the central bank to exercise “effective control” over public sector banks, as it did with the private players, on “an ownership-neutral basis”.
At the same time, the regulator sought to protect its turf and suggested that the proposal for an audit by CAG was “debatable” as there were three layers of audit — concurrent, internal and statutory. “It is debatable whether adding a fourth layer, of audit by CAG, will have much incremental impact.”
On the issue of fraud at PNB, the RBI’s detailed response said a bank’s risks were expected to be managed under three lines of defence. The first, it said, were the officials performing the line functions to assume, own and manage risks.
In the second line are risk monitors, specialising in overseeing decisions of the first line of defence. The final line are the audit functions. “In case of PNB, there seems to have been a failure of all three lines of defence, resulting in perpetration of such as large-value fraud,” it said.
2016, 2017: banks understate their NPAs
In 2017, the RBI for the first time asked banks to disclose in their balance sheet any divergence between bad loans identified by the central bank during its inspections and the non-performing assets (NPAs) recognised by the bank earlier. Sharp divergences indicate that banks have been hiding some bad loans.
Time-bound NPA resolution tough under bankruptcy code
The RBI's big bang announcement directing banks to proceed against 12 borrowers under the Insolvency and Bankruptcy Code (IBC) has raised expectations of an early resolution. But experts say the new law is unlikely to be a magic wand to immediately cleanse balance sheets of banks, adding that legal tangles and lack of infrastructure for executing bankruptcies may emerge as impediments to early resolution of bad debts.
Borrowers have already been able to stymie lenders in the National Company Law Appellate Tribunal (NCLAT). Also, in one of the early cases filed by ICICI Bank, the National Company Law Tribunal (NCLT) fined the lender Rs 50,000 for inflating the claim against the defaulter. In another case, the appellate body overturned a ruling by the NCLT and declared the appointment of an interim resolution professional as illegal. In light of this experience, industry watchers say that prospects for either a resolution in 180 days (extendable by 90 days) or recovery through liquidation looks challenging.
“One needs to evaluate if the necessary infrastructure for executing such a mandate is available and prepared to manage these 12 cases. The entire ecosystem, including insolvency professionals, tribunals, banking and investors, is still building capacity and capabilities,“ said Ashish Chhawchharia, partner at Grant Thornton Advisory . Given the strict timelines under the code, it will take considerable efforts from all stakeholders to reach desirable solutions, he added.
Insolvency professionals step in after bankruptcy is initiated and manage the process until resolution. According to bankers, there are not enough insolvency professionals in the country to keep up with defaults. The RBI has not made the list of 12 borrowers public, but the names are already doing the rounds in banking circles and news reports (see graphic).
According to Karthik Sri nivasan, group head (financial sector ratings), ICRA, a key imponderable is the extent to which these decisions could be challenged in the courts, thus delaying the process. ICICI Bank had registered the maiden case with the IBC in midJanuary against Innoventive Industries, which has approached both the Bombay high court and NCALT on grounds that the principles of natural justice were violated since the company was not given adequate notice. “The outcome of the first case filed under IBC can be expected later this month or early next month, which will also provide clarity on kind of resolution agreements reached between different counter-parties,“ said Srinivasan.
The other concern is the relief that needs to be provided to businesses to make them viable enough to be sold. “Even the large stressed companies need a 30-80% reduction in interest burden to fully cover interest at current profitability . There fore, stress resolution will need additional provisioning and capital. ICICI Bank is the only corporate lender that appears comfortable on capital,“ said Ashish Gupta and Kush Shah of Credit Suisse in a research report.
While banks now have the power to sell off assets, offloading several steel plants at the same time might lead to a crash in valuations. “If there is alarge number of assets put up immediately for liquidation, mostly in the next one year, only a few may get closer to a realisable value while the rest may have to be liquidated at very high discounts,“ said M B Mahesh of Kotak Institutional Equities Research in a report. The option available to banks would be to temporarily take over the company by converting debt to equity .
May 2017: “Written-off” assets by banks
Just A Technical Exercise To Clean Up Accounts, Says RBI
All scheduled commercial banks (SCBs) wrote off Rs 2,25,180 crore cumulatively in the five-year period ended March 2016, the Reserve Bank of India (RBI) said in an RTI reply filed by TOI. SCBs represent all public sector banks, private sector banks, foreign banks, regional rural banks and some co-operative banks.These represent over 95% of the formal credit given out by all financial institutions in the country. “This could be the highest ever write-off in a fiveyear period in absolute terms as are the total stressed assets in the banking system,“ said Abhishek Bhattacharya, director and co-head for financial institution India Ratings.
Banks and the RBI have often stated that these write-offs are just technical in nature and an exercise to clean up the balance sheets. They have further argued that banks continue to retain the right to recovery from these written-off accounts. “Writing off of non-performing assets (NPAs) is a regular exercise conducted by banks to clean up their balance sheets. A substantial portion of this write off is, however, technical in nature. It is primarily aimed at cleansing the balance sheet and achieving taxation efficiency . In `technically written off' accounts, loans are written off from the books at the head office, without foregoing the right to recovery . Further, write-offs are `generally' carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks,“ the RBI said in a clarification to a media report, based on an RTI reply in February 2016.
Be that as it may , the recovery from written-off accounts constitute only a tiny fraction of the overall written-off accounts, available data shows. In the financial year 2014-15, banks could recover only 11.85% (Rs 6,968 crore) of the written-off accounts in that year and 13.8% (Rs 9,717 crore) of the written-off accounts in FY 2015-16. The data for previous three years is not available with the RBI, it said.“The information on recovery from written-off accounts from FY 2011-12 to 2013-14 is not available with us,“ the RBI said in its RTI reply.
Though the amount from recovered loans in FY15 and FY16 might not pertain to that financial year alone, the numbers show the actual recovery to be only a tiny fraction of the total amount written-off and also to be a long protracted process.
In each of these five years, loans written off showed an increasing trend -at an average addition of over Rs 12,000 crore each ye ar. The worst year was FY15, when banks cumulatively wrote off Rs 16,550 crore more than the previous year. Banks reduce written-off loan accounts from their overall nonperforming assets. Adding the same back, the actual gross NPAs at banks could look a lot worse every subsequent year than it already does.
Written-off loans accounted for 11-16% of overall bad loans of the bank in each of those years (see table). Since 2011, banks started lending heavily to large corporates and, according to analysts, the problem suddenly became a lot bigger as “corporate leveraged built up“. The traditional tools of recovery like debt recovery tribunals, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, have become blunt in the face of such huge bad loans from large corporate accounts.
“Newer mechanisms are needed to deal with these big loans and they have to be dealt with on a going-concern basis. The usual recovery mechanism will not work,“ said Bhattacharya. He added, “Recovery will take time and won't happen in hurry .“
RBI to expand oversight committee
Asks Bank Boards To Empower Execs To Tackle Bad Loans
The RBI has said that minority lenders who stymie a decision by majority lenders on bad debt resolution will face enforcement action. The central bank has also directed boards of banks to empower executives to take decisions to address bad loans.
The RBI has said that it will expand its current two-member oversight committee with a large number of members to endorse proposals for resolution of bad debt from banks. The large number of members brought into the oversight committee will man various benches to clear proposals from banks. The expansion of the oversight committee is aimed at providing protection to executive decisions by banks to take haircuts on loans to bring them back on track.
Currently , the two-member oversight committee has a very limited role. “While the current members will continue in the reconstituted oversight committee, names of a few more will be announced soon,“ the RBI said.The RBI clarified that a corrective action plan could include flexible restructuring as well as a strategic debt recast -a scheme where banks acquire stake and find new owners for defaulting business. It would also include the more recent Scheme for Sustainable Structuring of Stressed Assets (S4A). Under the S4A scheme, banks identify how much of a stressed debt is sustainable and provide relief by converting debt to equity.
The RBI has said that rating agencies would have a major role to play in the new scheme of things. However, to prevent rating-shopping or any conflict of interest, the RBI has said that it is exploring the feasibility of rating assignments being determined by the RBI itself and pay for from a fund to be created out of contribution from the banks and the central bank.
In an attempt to ensure that multiple lenders in a consortium are able to move ahead on resolving bad debt, the RBI said that consent required for approval of a proposal was changed to 60% of lenders by value instead of 75% earlier. In terms of numbers of lenders, at least 50% will have to continue to agree. Minority lenders who do not agree must either exit by bringing in a new lender or adhere to the decision of the Joint Lenders Forum (JLF). All lenders have to implement the decision of JLF without any additional conditionality .
2018: Recapitalisation plan
Capital allocation for state-run banks, 2017-18
The government unveiled details of its bank recapitalisation plan with a capital infusion of over Rs 88,000 crore in the current financial year for 20 state-run banks and linked it to a sixpoint reform agenda to restore their health and step up lending to aid growth.
Last year, the government had announced a package to breathe life into ailing PSBs through a Rs 2.11 lakh crore infusion to provide them capital for lending and reviving investment, crucial for job creation in Asia’s third-largest economy.
We inherited major problem: FM on NPAs
According to government’s plan, over the next two years it will use recapitalisation bonds worth Rs 1.35 lakh crore. It will also provide support of Rs 18,000 crore and the remaining Rs 58,000 crore will be raised by banks. “We inherited a very major problem and therefore, we have been involvedin finding a solution to that problem”, finance minister Arun Jaitley told a news conference.
“Our role really is not only to find a solution but also to create an institutional mechanism to make sure that what happened in the past is not repeated. Now the entire objective of this exercise is that the government has the prime responsibility of keeping the public sector banks in good health,” he said.
The capital infusion plans for 2017-18 include Rs 80,000 crore through recapitalisation bonds and Rs 8,139 crore as budgetary support. In addition, the banks will raise Rs 10,312 crore through share sales. The government expects that the measures undertaken will help additional credit offtake capacity of state-run banks by more than Rs 5 lakh crore.
“Each public sector bank (PSB) is an article of faith. All PSBs will be adequately capitalised and enabled to serve people and support inclusive growth,” said Rajiv Kumar, secretary, department of financial services, asserting that no state-run bank willfail.
The reform agenda is aimed at EASE (enhanced access and service excellence) and focusses on six themes of customer responsiveness, responsible banking, credit offtake, UdyamiMitra for small and medium enterprises, deepening financial inclusion and digitalisation and developing personnel. The government will also launch a survey by an independent agency to monitor the rollout of reform measures and measure public perception about improvements in access and service quality. Results of the survey wouldbe publishedevery year.
“Capital infusion by the government is contingent on performance of PSBs on the reform. Whole time directors of PSBs would be assigned theme wise reforms for implementation. Their performance in this regard would be evaluated by the bank board,” a finance ministry statement said.
As part of the reform agenda, banks will need to tie up with agencies for specialised monitoring for clean and effective post sanction follow up in loans above Rs 250 crore. For large consortium loans the minimum exposure should be 10%. Banks will also needtoset up a stressed asset management vertical and all corporate lending will have to follow rigorous due diligence. They will also needto appoint a chief risk officer to check “aggressive and imprudent” lending.
The NPAs of the weaker Indian banks, as in 2018 September
As in September
RBI: 4 banks had GNPA ratios higher than 20%
‘16% Of Bad Debt Came From Top 100 Borrowers’
Indian banks’ capital adequacy ratio improved significantly to 15.1% in September 2019 after recapitalisation of public sector banks (PSBs) by the government, the RBI warned. The provision coverage ratio (PCR) also rose to 61.5% from 60.5% a year earlier, implying increased resilience of the banking sector. “Macrostress tests for credit risk show that under the baseline scenario, SCBs’ gross non-performing asset (GNPA) ratio may increase from 9.3% in September 2019 to 9.9% by September 2020, primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth, RBI’s FSR noted.
It pointed out that state-run banks’ GNPA ratio may increase to 13.2% by September 2020 from 12.7% in September 2019, whereas for private banks it may climb to 4.2% from 3.9%, under the stress scenario. On the other hand, foreign banks’ GNPA ratio may increase to 3.1% from 2.9%. The central bank said that Indian banks’ net non-performing assets (NNPA) ratio declined in September 2019 to 3.7% due to increased provisioning.
The report also pointed out that bank-wise distribution of asset quality showed that while 24 banks had GNPA ratios of under 5%, four banks had GNPA ratios higher than 20% in September 2019. The asset quality of agriculture and services sectors, as measured by their GNPA ratios, deteriorated to 10.1% from around 8% a year earlier. However, for the industry sector, slippages fell sharply to 3.8% per cent from around 5%.
The report showed that the share of large borrowers (between Rs 100 crore and Rs 5,000 crore) in banks’ total loan portfolios fell to 51.8% from 53% while their share in GNPAs improved to 79.3% from 82.2% earlier. It noted that the top 100 large borrowers accounted for 16.4% of banks’ gross advances and 16.3% of GNPAs.
Gross NPAs of public sector banks as of March 2020 (Rs. crore)
Loan recovery cases of PSUs
Loan recovery cases of Indian PSU banks, presumably as in Dec 2022
2017: ‘misselling’ made punishable
Ombudsman's Ambit To Cover Mobile Banking Complaints
Banks for the first time have been made accountable for misselling third-party products like insurance policies or mutual fund schemes. Customers can also file complaints against banks for problems with mobile and digital banking services.
The RBI said that it has widened the scope of its Banking Ombudsman Scheme 2006 to include deficiencies arising out of sale of third-party investment products by lenders. Under the amended scheme, a customer would also be able to lodge a complaint against banks for non-adherence to the RBI instructions with regard to mobile or electronic banking services.
Following the amendment, the pecuniary jurisdiction of the ombudsman to pass an award has been doub led from Rs 10 lakh to Rs 20 lakh. The ombudsman has been empowered to award compensation not exceeding Rs 1 lakh for loss of time, expenses incurred and also harassment and mental anguish suffered by the complainant. There is also an option for customers to go in for appeal in respects to closed complaints which was not available earlier.
Until now, if the buyer of an insurance policy or mutual fund was missold she had to seek redressal from the insu rance company or the mutual fund. This was a departure from global practices. For instance, last year in UK four of the biggest banks, Barclays, HSBC, Lloyds and RBS, faced large fines for misspelling payment protection insurance.
There are 20 ombudsmen in India, each with a territorial jurisdiction. Aggrieved customers can lodge their complaints with the ombudsman either through an email or a post. However, before filing a complaint with the ombudsman the customer has to approach the grievance redressal department of the bank and wait 30 days for a response. Unlike the courts, no fees are required to be paid.However, the ombudsman can refuse to hear a complaint if it is time-barred or already heard in some other court. In FY16, the office of banking ombudsman received 1.03 lakh complaints.
Best and worst performing banks
India’s best 5 and worst 5 performing banks as judged by NPAs, net interest margin’, capital adequacy ratio, Current Account Savings Account (CASA) ratio, credit-deposit ration etc., presumably as in 2020 Feb
Point-of-sale (PoS) terminals
Axis Bank is 2nd largest in PoS machines
Axis Bank has become the second-largest merchant-acquiring bank in the country, leapfrogging two spaces during 2021 by installing over two lakh card-swipe machines during the year.
The bank’s market share in the number of devices has gone up from 15% in January this year to 16% up to October. Its share in spending is even larger as the bank is constantly tracking the number of inactive terminals.
HDFC Bank dominates the merchant-acquiring space followed by Axis Bank, which has overtaken SBI and ICICI Bank.
2018: corporate banks lose sheen
India’s corporate banks faces competition from fintechs in 2018
2019/ For CEOs: 70
The Reserve Bank of India has refused to relent on its guidelines requiring chief executives of private banks to mandatorily retire at the age of 70, setting the stage for Aditya Puri to step down as HDFC Bank managing director and CEO next October, while Romesh Sobti will retire as IndusInd Bank chief at the end of the financial year.
While bankers had been indicating that the regulator was reviewing the retirement age, sources said, a few months ago RBI conveyed its decision to the two banks where the incumbents were nearing the retirement age, with many expecting a fresh extension.
Some bankers had raised the issue of bringing RBI’s rules on a par with the new Companies Act that allows CEOs to continue till the age of 75. But RBI is of the view that 70 years is a reasonable age for a private bank chief to hang his boots as banking is a high-pressure job, sources told TOI. “It is not like a minister’s job, where he is assisted by a team of officials,” said a source.
RBI has already conveyed this to boards of banks that decide on a CEO. Sobti is set to retire in March 2020. It was earlier speculated that the board would seek an extension for Sobti. On Thursday, the bank said that the board has finalised a candidate for the post of MD and an application has been forwarded to the central bank. This followed a meeting of the nomination and remuneration committee of the board.
HDFC Bank appointed Sashidhar Jagdishan as a change agent and assigned him several important portfolios of the bank. Paresh Sukthankar, who held the number two position in the bank for several years had quit last year.
Regional rural banks
Vis-à-vis Small finance banks:
Regional rural banks Vis-à-vis Small finance banks, 2021
Savings bank deposit accounts, basic (BSBDAs)
Banks sometimes convert them into regular a/c’s
The Reserve Bank of India (RBI) has gone on a promotion overdrive for the ‘zero balance, zero charges’ account that banks provide.
The RBI has been sending bulk SMSs about this account during IPL matches. However, crores of basic savings bank deposit account holders — including those having Pradhan Mantri Jan-Dhan Yojana accounts — risk having these accounts abruptly frozen by banks.
The accounts allow only four free debits a month and, since banks are not allowed to impose any kind of charge on customers, many are freezing the accounts once four transactions are complete. A few like HDFC and Citi are converting these accounts into regular ones if the number of transactions exceed four, which means the account holder pays a regular penalty if minimum balance is not maintained.
Unlimited e-transactions should be allowed under basic a/cs: Report
The basic savings bank deposit account (BSBDA) was aimed at financial inclusion and, therefore, kept free of all charges. To make it viable for banks, the RBI kept the maximum withdrawals from the account at four a month, going by average withdrawals.
However, banks have extended the term free debit transactions to include not just ATM withdrawals but also debit by way of real-time gross settlement (RTGS), NEFT, clearing, branch withdrawal, transfer, internet debit, and EMIs.
For the purpose of withdrawal, the account stands frozen once four transactions are completed in a month. This means that if a customer withdraws money twice and uses the debit card twice in 20 days, he will have to wait until the next month to access his money again.
The issues with the BSBDA have been highlighted in an IITBombay technical report — ‘Can BSBDA depositors have long innings? Be aware and remain vigilant’ — authored by Ashish Das, who has for years been researching and surveying impact of steps taken towards financial inclusion.
Of the banks covered in the report, State Bank of India (SBI) and Axis Bank prevent customers from undertaking any debit transaction beyond four in a month, virtually freezing accounts thereafter for the customer. HDFC Bank and Citi say that they will convert the basic account into a regular account if a customer withdraws for a fifth time. ICICI Bank in the past used to charge for the fifth transaction, but has refunded the amount after being told that they cannot apply charges. It currently allows free transactions beyond four. Other banks do not divulge what measures they will be taking after the four free transactions are exhausted.
In the report, Das pointed out that after four debits in a month from a BSBDA, the customer would no longer be able to make online purchases, transfer money through BHIM or use RuPay debit card at merchant locations for his day-to-day purchases. “Inhibiting the financially included folks to transact digitally through their bank accounts is a blow to our country’s digital payments drive. The very nature of the RBI regulation has forced banks to limit the BSBDA usage,” said Das.
The report has suggested that banks should give unlimited electronic transactions under BSBDA and the restriction should apply only to cash withdrawals. Incidentally, banks earn a fee when their debit cards are used for shopping.
Small finance banks
Small finance banks in India, 2018.
2019: 7/ 10 of worst-performing bank stocks are Indian
7 of the world’s 10 worst-performing bank stocks are in India
IDBI Bank leads share price losses among state-run banks, having slumped about 60% this year.
The spiral of gloom is showing no signs of abating for Indian lenders.
Seven of the 10 worst-performing bank stocks globally are from Asia’s third-biggest economy, data compiled by Bloomberg show. There are likely to be more dark days ahead as the lenders, already battling with the world’s highest soured debt, face fresh challenges to their asset quality from the slowdown in economic growth and the lingering crisis at the shadow banks.
“It’s a double-whammy for lenders as a slowing economy has added to their existing woes with asset quality and fund-raising plans,” said Pritesh Bumb, an analyst at Prabhudas Lilladher Pvt. in Mumbai.
At the top of the heap, of course, is Yes Bank Ltd., which has seen its shares crash 70% this year on concerns about the lender’s thinning capital buffers and its sizable exposure to the cash-strapped shadow lenders.
While Yes Bank last week raised about $273 million selling shares to large investors, the market remains jittery about its holding of pledged shares. The stock is down over 25% this week after CG Power Ltd., in which the bank owns a 12.8% stake, on Tuesday raised red flags over “suspect, unauthorized and undisclosed” transactions.
IDBI Bank Ltd. leads share price losses among state-run lenders, having slumped by about 60% this year. The bank’s provisions for bad loans have risen for seven straight financial years through March 2019, forcing it to set aside 192 billion rupees ($2.7 billion) last year -- an amount that almost equals its current market value.
CHENNAI: Endearing, interactive and superfast with data, India's first banking robot Lakshmi made her debut on Thursday in the city. Launched by the Kumbakonam-based City Union Bank, the artificial intelligence powered robot will be the first on-site bank helper.
Top private lender HDFC Bank, which is also experimenting with robots to answer customer queries, is testing its humanoid at its innovation lab. Lakshmi, which took more than six months to develop, can answer intelligently on more than 125 subjects.
Want to know your account balance? Interest rates on home loans? Deferred payments or possible charges to be incurred on fixed deposit closure? Lakshmi can answer it all. "Apart from answering generic questions, we have also programmed it to connect to the core banking solution. If a customer wants to know his bank account details or transaction history, the robot can flash the answer on its display," said N Kamakodi, MD and CEO, City Union Bank.
Sensitive financial information like account details are displayed discreetly on the robot's screen and not voiced. "Lakshmi only talks out loud on generic subjects. If you visited our branch with your girlfriend, she won't embarrass you by showing your low account balance," joked its CEO.
Lakshmi, who currently speaks in English, gestures, turns around and engages in a very life-like manner in conversations. Unlike most robots her speech is not formal, but more relaxed and casual. "Since its artificial intelligence, the robot is constantly learning from customers - the more interactions it has with customers the better it gets," said a bank executive.
And what if a question stumps Lakshmi? "She then asks you to get in touch with the branch manager. But at the back-end, we will be collecting all the questions she was unable to answer and equip her with better data sets, so she can service customers. Today she can give real time updates of foreign exchange movement, current interest rates at banks for different asset classes like personal, educational, two-wheeler and home loans, possible charges on withdrawals or deposits. But going forward, she might be able to more than that," said its assembler Vijay V Shah of Coimbatore-based Vishnu Engineering.
Cash deposit machines (CDMs)
Unlike ATMs, which can be recalibrated, CDMs, which identify and separate currency , are “taught“ to detect counterfeit notes by presenting different kinds of fakes. This may take several weeks, or even months.
To promote self-service and make available all banking services around the clock, banks have been installing CDMs and pass book printers in e-banking kiosks, in addition to ATMs. CDMs are distinct from ATMs that also accept cash deposits in envelopes, although they are operated in the same manner using a debit card. The advantage of a CDM is that all successful transactions are immediately credited to the customer's account.
According to Navroze Dastur, India MD & CEO of ATM maker NCR, ATM manufacturers require six weeks to tune the CDMs to accept new high-denomination notes and to identify fakes.
CDMs can count the notes, verify denomination, quality and authenticity and do everything that a bank teller can. “Before the CDMs starts accepting new currency , the developers need to come to India and programme the machines to identify the new notes. The bigger challenge is getting the machine to learn wat is a fake note,“ said Sunil Udupa, MD, Securens Systems, which offers ATM services to banks. Helping the machine identify fake currency notes requires samples of fake notes which are currently not there for the new notes, said Udupa.
There are close to 30,000 cash deposit machines in the country and they have made life easier for banks in accepting bulk deposits. These machines have been imported from international manufacturers -Wincor Nixdorf, NCR, Diebold and OKI. Their engineers will need to come and reset the machines. Until they are reconfigured, the machines can be used only for the Rs 50 and Rs 100 notes, which continue to be legal tender.
In the one week after the demonestisation of Re500 and Re1000 notes (on Nov 9 2016), SBI saw 45 lakh transactions at its 6,000 CDMs between November 10 and November 16, helping Rs 7,384 crore to be deposited. The total value of transactions in CDMs has been more than the Rs 3,565 crore the bank has seen in its ATM network.
Term deposit rates
Small savings rates are preventing rate cuts by the RBI from being passed on to the banking system, the Economic Survey indicated, reiterating a point made by the central bank in the past. Until rates on small savings like the public provident fund (PPF) fall, term deposit rates are unlikely to decline.
Although there is a formula where small savings rates are reset by the government every quarter, the revision has not been very effective. In December 2019, RBI governor Shaktikanta Das had said in the context of monetary policy transmission that there is also a need for greater flexibility in adjustment in interest rates on small saving schemes.
The survey has pointed out that while there has been a reduction in the savings deposit rate by 25 basis points (100bps = 1 percentage point) in 2019, the term deposit rate, which is more important, has seen a decline of only 16bps from January 2019 to October 2019. “An important limiting factor seems to be the rates on small savings schemes like PPF. In 2014, the weighted average term deposit rate was the same as PPF, however, the gap between them is 115bps at Octoberend 2019,” the survey said.
Das had in his policy said the RBI has communicated its views to the government on the issue of small savings rates and the government would take a considered call in the matter. According to the survey, RBI’s monetary easing and release of liquidity have had some impact on short term interest rates. However, this impulse is not feeding through to longer-term maturities. Since beginning of the year, yields on short term government securities (364 days T-bill) have declined much faster than that of long-term government securities (10-year G-sec).
Typically when the RBI cuts rates, yields on government bonds fall. A fall in yields hikes price of existing stock of government bonds held by banks, who make profit by selling these bonds.
Mode of transactions, 2018-19
See graphic, ‘ Bank transactions in India through RTGS, paper clearing, IMPS and EFT/NEFT: 2018-19 ’
Unified Payments Interface
Please see: Unified Payment System/ UPI: India
Diwali withdrawals, 2008-18
Close to Rs 50,000 crore moved out of banks as Indian accountholders withdrew wads of cash ahead of Diwali. According to data released by the RBI, currency in circulation shot up to Rs 20.2 lakh crore as on November 9 — an increase of Rs 49,418 crore in the Diwali week, the highest growth ever outside the demonetisation period.
The biggest weekly increase in currency in circulation was in the week ending January 13, 2017, which saw an additional Rs 52,786 crore flow out of banks as currency presses worked overtime to replace demonetised notes.
After demonetisation, the year-on-year growth in currency in circulation had been negative for 53 weeks. The currency in circulation recovered to pre-demonetisation level of nearly Rs 18 lakh crore in March this year. While there were indications that increase might plateau off, demand for banknotes has been strong this year with year-on-year growth being in excess of 20% for most of the year. However, withdrawals have been strong with accountholders pulling out over Rs 2.6 lakh crore from ATMs every month.
An increase in currency in circulation reduces the lendable resources of banks and pushes up interest rates. However, bankers say that historically currency returns to the banking system after festivals as individuals spend money and businesses deposit the cash back in banks.
The currency in circulation witnesses a sharp increase ahead of elections. In 2013, former governor Raghuram Rajan had said that “Around election time, cash with the public does normally increase... You can guess as to reasons why, we can also guess,” . He added: “You see some (spike) not just in the state going to elections, but also in the neighbouring states. There is something... We need to understand it better.”
And the list is growing…
Banking, India: I