HOT BANKING TOPICS FOR 2021

BANKING: HOT TOPICS 2021

    1. ASSET QUALITY:  As per Financial Stabilty Report,  Jan 2021 (FSR) released by RBI, the GNPA ratio, which dropped down to 7.5% in Sep 2020  (from 8.2% in Mar 2020) is likely to reach 13.5% in Sep 21 under the baseline scenario and may escalate to 14.8% under a severe stress scenario. This is worrisome since the government and RBI initiated various measures (given below) to address the financial difficulties, arising out of COVID 19, faced by both individual and non-individual borrowers. 

Additional Funding:

• Emergency Credit Line Guarantee Scheme (ECLGS) was extended in May 2020 to all MSMEs having credit outstanding of upto Rs.50 cr. and business turnover up to Rs.250 cr., as part of atmanirbhar package announced by the Central Government. Eligibility for availing the facility was that the accounts of the borrower shall be standard assets and the past due of the accounts shall be less than or equal to 60 days (SMA 0 and SMA 1) as on 29.02.2020 (ECLGS 1.0)
• The above scheme was further extended to all entities in the health and 26 other sectors in November 2020. It covered all borrower entities having credit outstanding of above Rs.50 cr not exceeding Rs.500 cr from the banking system provided the accounts are standard and the past due of the accounts are less than or equal to 30 days as on 29.02.2020 (SMA 0) (ECLGS 2.0)
• Under the above schemes, additional funding up to 20 per cent of their total outstanding credit was  made available to the borrowers by the banks, as a collateral free Guaranteed Emergency Credit Line (GECL) (fully guaranteed by NCGTC - National Credit Guarantee Trustee Company Ltd)
• Rs.2.05 lac cr. of loans were sanctioned by the banks under ECLGS 1.0, of which disbursals aggregating Rs.1.52 lac cr. were made till November 2020 

Restructuring

RBI announced COVID 19 Resolution Framework in August 2020, permitting banks to restructure the stressed loans under personal loans and corporate loans category, which were standard but not in default of more than 30 days as on 1st March 2020. Major Conditions included:

• In respect of loans to individuals (including  personal loans and credit cards), the last date for the banker and the borrower to agree for restructuring as per the resolution framework (called 'invocation') was fixed as 31st December 2020. The agreed restructuring exercise should be implemented within 90 days of invocation.
• For Corporate Loans and other eligible loans (other than MSME and Agriculture), the last date for arriving at an agreement to restructure as per the framework was fixed as 31st December 2020; however 180 days time (instead of 90 days given for individual accounts) is given for implementation of the restructuring. 
• In addition to the above, any loan under MSME, which is standard as on 1st March 2020 is eligible for restructuring and the implementation should be completed by 31st March 2021

Despite the above relief measures, if the regulator anticipates a 6% jump in GNPAs in the banking system, the probable answer lies in the following facts:

1. Moratorium on payment of instalments and interest that were due between 1st March 2020 and 31st August 2020, was extended to all loan accounts that were standard as on 29th February 2020. So the loans included all Standard Assets under SMA 0, SMA 1 and SMA 2. (All accounts having past dues upto 89 days covered). However the resolution framework announced by RBI covered only loans, which were standard assets under SMA 0 category (past due up to 30 days), except MSME, where loans with past due up to 89 days as on 1st March 2020 are covered. 
2. ECLGS 1.0 excluded SMA 3 category borrowers and ECLGS 2.0 excluded both SMA 2 and SMA 3 borrowers
3. Agriculture segment was left out of the resolution frame work. As on 31st March 2020, the GNPA under agriculture was 15.1 percent, having moved up from 12.1 percent as on 31st March 2019. 
4. As per the interim order issued by the Supreme Court, no loan, which was classified as Standard Asset as on 31st August 2020 can be classified as NPA till further orders. So none of the accounts where the past due (excluding the 6 month moratorium period March-August 2020) crossed 90 days during September 2020 could be classified as NPA.  In addition, all the loans that did not avail the moratorium but became NPAs in the normal course (90 days over due) after 31st August 2020, also cannot be classified as NPA without further direction from the Court. Though some banks had termed such accounts under proforma NPA as per IRAC norms and indicated the same in their notes to accounts, not all the banks followed the same procedure. 
5. There are borrowers, who could sustain during the COVID lock down period and met their dues from their surplus cash, but could not revive in the post COVID scenario due to change in economic factors and business fortunes. 
6. Failed restructuring after date of invocation.

Impact in the books of the banks

Gross Bank Credit as on 30th September 2020 was Rs.103 lac cr. Even assuming no growth to this level as on 30th September 2021, 6% increase in GNPA (as projected by RBI in its FSR) means the GNPA will go up by Rs.6 lac cr. The provision requirements for SSA is 15% for secured outstanding and 25% for unsecured exposures. Taking the provision requirements at 20% on the additional NPAs, the provision requirements comes to Rs.1.2 lac cr. for the banking system. In addition, the banks will be deprived of the interest income on the fresh NPAs.  Taking the average yield at 8%, the interest income that will be lost due to fresh NPAs, works out to Rs.48 lacs p.a. There will also be interest reversals , which were booked on 'accrued income' concept. 

So the effect of 6% increase in GNPA is that the banks should find means to meet the provision requirements plus loss of interest income aggregating app. Rs.1.75 lac cr. Public Sector Banks (PSBs) account for 60% of the gross bank credit and 75% of the GNPAs of the banking system. So the likely impact on the income and capital of PSBs is around Rs.1.25 lac cr.

(As per assessment indicated by major banks, informally with media and others, upto 2% of gross bank credit may get restructured. No additional provision is calculated for this portion as RBI has already advised the banks to keep 10% provision on such assets. There may not be any interest reversal, since the restructuring is done, while the loans remain standard assets. One fervently hopes that only ‘viable loans’ are taken up for the restructuring exercise unlike the massive restructuring done during the period 2010-11 to 2014-15, majority of which subsequently became NPAs post AQR)

     II. CAPITALISATION OF PSBs:

What is the need? As per FSR released by RBI, the system level CRAR is projected to drop from 15.6 per cent in September 2020 to 14.0 per cent in September 2021 under the baseline scenario and to 12.5 per cent under the severe stress scenario. As on 31st March 2020, the RWAs of PSBs was Rs.54.46 lac cr. and CRAR was 12.9%. As discussed in the last paragraph, the impact of likely provision and interest income loss on account of additional GNPAs is around Rs.1.25 lac cr. for PSBs. This is equivalent to 2.3% of CRAR on the existing RWAs (54.46 lac cr). So, the CRAR of PSBs might go below regulatory prescription of 10.875%, unless the burden is met out of retained earnings/fresh capital. Not much of cushion available in the operating profit (it was Rs.1.74 lac cr in FY 2019-20). Hence the funding has to come as equity from the government as well as from the market and also by way of issue of AT1 and tier II bonds. In this regard, every one expects the economy to revive in 2021-22. Even on a conservative basis, 10% credit growth should happen, which works out to Rs.6 lac cr. Taking into account the recent changes in the definition of retail credit and the risk weights on different assets, the increase in RWAs is estimated at Rs.5 lac cr.  (app.)

Hence total capital requirements needed by PSBs by March 2022 : Rs.2.35 lac cr.

(Likely impact on account of provision and loss of interest income : R. 1.75 lac cr; Towards increase in RWAs: Rs. 0.60 lac cr.)

How the capital needs were met in the past:

Till the Asset Quality Review(AQR) was conducted by RBI, capitalisation of PSBs was never given a serious thought by the government and the yearly allocation from the budget till 2014-15 was less than Rs.10,000 cr.  The government infused Rs.25000 cr. each in 2015-16 and 2016-17, which was not adequate to meet the substantial increase towards provision requirements and consequent losses. As more than handful of PSBs were brought under Prompt Corrective Action (PCA), the credit growth towards identified priority sectors suffered, affecting the economic progress of the country. So in 2017-18, the Finance Minister announced equity infusion of Rs.2.11 lac cr. comprising cash outlay from the budget as well as 'cash neutral - recapitalisation bonds' (recap bonds) route. This helped the banks under PCA to increase capital,  provision requirements and also reduce NNPAs ratio, which factors enabled them to come out of PCA.(Achieving stipulated minimum CAR and maximum NNPA ratio are two essential parameters for coming out of PCA). In the last five years, Rs.3.16 lac cr had been infused as equity into the PSBs.

Financial Impact on the government:

Major portion of equity infused into the PSBs in the last five years was through 'recap bonds' programme.  By this, the banks, that are to receive equity support, invested into the recap bonds (10-15 years maturity) issued by the government. With the money received thus, the government placed the same amount as equity into the banks concerned. Though this is cash neutral, the government carries the interest  obligation and the liability to meet the bond amount on maturity. It is estimated that Rs.1.20 lac cr should be paid by the government in the next five years towards interest obligations arising out of the bonds. 

Recent trends:

1. Punjab & Sind Bank got Rs.5500 cr. as equity through 'recap bond' this year, but the bond carry 'nil interest'. This saved the government from interest payments in future. However this will affect the bank's average yield on investments.  Also, the money invested is out of interest carrying liability like deposit accepted from the public or long term borrowings. Investing into 'nil' interest bonds, from interest carrying resources will affect the profitability of the bank

2. PNB, the second largest PSB, came into the market to raise Rs.7000 cr. through the QIP route.  But it could raise Rs.3788 cr only (56% of the total amount issued).  LIC contributed Rs.1500 cr and Societe Generale contributed Rs.1500 cr. Without these two institutions, the contribution from other institutions is very limited. 

3. IDBI Bank, though termed private sector now, as the government holds less than 50 percent, still the equity held by the government and the PSU-LIC is in excess of ninty percent of the total equity.  The Bank entered the market to raise Rs.3000 cr. by way of QIP. It could canvass only Rs.1435 cr, of which Rs.900 cr. was contributed by PSBs

4. AT1 and Tier II bonds were issued by a few banks.  However the amount raised  so far is very small compared to the capital requirements likely in 2021-22, that might arise out of expected increase in stress assets and credit expansion due to anticipated revival in the economy.  Due to Yes Bank and LVB episodes, where AT1 and Tier-II bond holders suffered, the interest cost of these bonds have gone up.  Only SBI could raise AT1 bonds of Rs.4000 cr. at a reasonable rate of 7.74% in September 2020.   Bank of Baoroda raised AT1 bonds in two tranches (aggregating Rs.1600 cr.) at 8.25% and 8.5% in July 2020. Union Bank of India raised AT1 Bonds of Rs.1000 cr. at 8.64% in Jan 21.

Likely Scenario 

From the above, it is clear that raising the money from the market either as equity or as eligible AT1/Tier-II bonds is going to be extremely difficult. Equity issues may not get fully subscribed and the bonds will come at an exorbitant cost. The immediate suggestion that comes to everyone, who is left oriented is that the government should continue to support through budget allocations/cash neutral recap bonds.  And ‘privatisation brings efficiency’ advocates will counter - “please transfer the shares of the PSBs into a Banking Investment Company (BIC) as recommended by PJNayak Committee”. With a mounting fiscal deficit on the cards, supporting thro’ budget allocations or taking a deferred liability by way of recap bonds may not be possible. The need of the hour is to frame short term and long term strategies.

1. Short term solution: Stressed Assets is the single most important issue that plagued the financials of Indian Banks for the last 10 years. COVID might have only aggravated the issue still further. India had successfully launched India development bonds from non resident Indians when the economy needed long term inflows to restore itself. RBI and the central government should consider seriously to launch ‘PSB Capitalisation Fund’, which can be subscribed by FIIs, Pension Funds, Insurance Companies, Mutual Funds, profitable PSUs and major financial institutions. The interest rate is at optimum level now for the government to bear and the bonds can be listed. Monies raised thus can either be placed as equity in PSBs to take care of the provisions as a one time measure or can be used as equity for starting a “Bad Bank” which will take over the bad loans of PSBs.

 2. Long term Solution: Any amount of infusion into PSBs might prove inadequate if 

(i) the skills of personnel and governance practices do not show improvement and 

(ii) the recovery through legal means continues to be inordinately delayed.

 

Hence simultaneous attention should be paid on these two aspects. The present situation on the above two points are covered in the next two hot topics:

III. Frauds in Banks:

Operational efficiency is one of the main parameters to evaluate the skills of the personnel employed and corporate governance practices followed by the organisation. Among other things, timely detection and prevention of frauds assumes great significance. As per 'Report on Trend and Progress of Banking in India, 2019-20' released by RBI, Scheduled Commercial Banks(SCBs) have reported Rs.3.63 lac cr. as frauds in the last three and a half years (From April 2017 to 30th September 2020). 98% of the frauds relate to advances and off-balance sheet exposures.  The fraud amount reported works out to  3.5 percent of the Gross Bank Credit outstanding as on 30.09.2020. The report, of course, mentioned that out of the total amount, Rs.2.82 lac cr. relate to period prior to April 2017. But there is always a time lag between occurrence of a fraud and detection. In the period prior to April 2017, frauds of the earlier years would have been reported. On the basis of reporting, nearly one per cent of loans sanctioned were reported as fraud every year beginning 2017-18. Top fifty credit-related frauds constitute 76% of the total amount reported as fraud in 2019-20. 

If one goes through the modus operandi, it revolves around six or seven known areas (two unusual frauds of bigger dimension reported is dealt as note* separately).

• Diversion of working capital for capital expenditure
• Loan amount was diverted as investment in parent/associates/subsidiary companies and this is used by the latter as margin brought in to avail fresh credit facilites.
• Loan amount siphoned by promoters/ invested in real estates unrelated to the organistion.
• Sub limits were opened in small branches and the utilisation is not monitored.
• Tripping involving hundreds of credits and debits in a day making it difficult to trace the origin/end beneficiary
• LCs, mostly inland LCs, were opened favouring shell companies/firms. LCs were discounted with small branches of the same bank or with other consortium members (by beneficiaries opening the accounts with the same bank/consortium) resulting in a vicious circle and ever greening of the loan accounts.
• Accounts were opened at 'C' category branches and foreign remittances were effected in 'B' category branches (Authorised Branches for forex) 
• Deposit accounts of government departments were opened at small branches and the money is prematurely closed/loan availed against the same by unscrupulous persons.  Bank becomes liable to pay the money to the government departments.

(*Note: Modus Operandi remains unclear in a few cases. Some of the frauds continued for a number of years like the 'Nirav Modi' fraud detected in a major PSB. It is still a mystery how a 'letter of comfort' (LoC) forex exposure went undetected for six to seven years.  Unless the LoC was renewed periodically, the fraud could not have continued this long. And every renewal should have been done with a higher amount (which includes interest accrued) or on receipt of interest at every renewal. Interest did not appear to have been paid at all. Hence renewal would have been done with enhanced amount every time. How this escaped the attention of so many higher officials and the various auditors is never explained. The foreign bank normally asks for confirmation from the regional/ head office on LoCs issued by branches, especially when the amount is substantial

Similar is the fraud reported in PMC Bank, where Rs.6700 cr representing 70% of total advances of the bank was extended to HDIL (Housing Development and Infrastructure Ltd) but appeared as fictitious retail loans in various branches.  The bank was under CBS and how this was done, one fail to understand.)

Steps taken: RBI had recently brought in guidelines to discipline 'opening of current accounts' by customers, who have availed cash credit/overdraft from the banking system, with banks who have not extended any credit facility. Early Sanction Review (ESR) is in place in most of the banks in respect of big advances. But the observation by RBI that the top fifty accounts contribute 76% of the total amount reported as fraud in loan account suggests that ESR system implemented needs a thorough review.  RTGS and NEFT occupy 90% of the total value of transactions carried out every day. Still, we have not changed our 'monitoring and follow up' procedures, which suited manually operated environment. Off-site surveillance has not yet replaced on-site inspection. There is considerable time lag (probably 2-3 years) between date of occurrence, date of detection and date of reporting of frauds. Preventive vigilance measures to prevent recurrence, though written down as part of operating procedure, are not implemented effectively, as the frauds reported repeatedly falls under one of the modus operandi methods described above.

IV. Recovery/Resolution of Stressed Assets:

State of Recovery: 

As per FSR, the total amount of cases filed before various legal channels (Lok adalats, DRTs, Sarfaesi Act, IBC) for recovery in the years 2018-19 and 2019-20 were Rs.7.25 cr. and Rs.7.42 cr. respectively. In addition, the book value of assets sold to ARCs (Asset Reconstruction Companies) during the same period was Rs.1.05 lac cr.  Against the above (totalling Rs.15.72 lac lac cr.), the recovery reported during the period under reference was Rs.3.20 lac cr. (most of the recoveries were from the cases filed during the prior period). As per the above statistics, every year, the banking system file suits/ initiate legal action (through various channels) for more than 7.0% of the gross bank credit outstanding and the recovery is just 1.5% of the same. (The above statistics given above does not include GNPAs arising out of agriculture and also the recoveries made in gold loan through auctioning.)

Speed of Recovery:

This is witnessed only in IBC referred cases and actions initiated by the banks on their own through SARFAESI Act. (90% of the recovery also happened through these two channels only). For the year 2020-21, the recovery is bound to be much less, as one year moratorium is given for referring 'default' loans to NCLT under IBC. Recoveries through lok adalats and DRTs continues to be at a lower pace. Through sale to ARCs, cash recovery of 15% of the successful bid amount (in the range of 40-50% of total outstanding) is made by the banks. The loan amount, equivalent to the balance amount of the bid amount is converted as SRs (Security Receipt) in the investment books of the banks. (Difference between loan amount outstanding and bid amount is written off. There is  no obligation on the part of ARCs to realise/repay the SRs on or before due date. The recovery will come, if the assets underlying the SRs were sold during the period of SR, which is six years. Any unrealised SR will lapse on maturity.

From the above, three things are clar:

a. The total amount where the banks have to approach legal channels every year is quite high at more than 7% of total advances

b. Shortfall in realisation of dues is in the range of 30-50%

c. Average time for realisation is 7-8 years, except in respect of NCLT referred cases.   Recovery through NCLT also slowed down in the recent years. With the moratorium of one year announced now, it might take a longer time in IBC also. Unless the quality of advance portfolio improves, NCLT may also go the DRT way, unable to handle the number of cases adding up each year.

Even if a 'Bad Bank' is set up, it is bound to fail if credit sanction culture is not enhanced in PSBs and the resolution through various channels are not speeded up

The need of the hour are

1) the credit appraisal, disbursal and monitoring standards should improve drastically in PSBs and

(2) the average resolution time through the various legal channels should not be beyond 2 years in non-NCLT  platform and 1 year in NCLT platform.

 V. DIGILTAL LENDING THROUGH APPS

When one borrows through online or mobile apps of the regulated/unregulated entities, he enters the danger zone of compromising his privacy as confidential data stored in his device is passed on to the lender under some pretext or the other. In the past few months, several instances of persons committing suicide as harsh and humiliating methods of recovery was resorted to by agencies, who have lent money digitally  through their mobile apps.  RBI has constituted a working group on digital lending to study the present practices adopted by both regulated unregulated entities and submit its recommendations for (i) promotion of orderly growth of digital lending, (ii) fair practices code, (iii) enhanced consumer protection and (iv) robust data privacy and security standards. 

Through online lending, both regulated and unregulated players have made inroads in micro lending, personal loans and issue of credit  cards. Availability of aadhaar as identity proof has helped completion of e-KYC formalities much easier. SCBs, SFBs and innumerable MFIs show keen interest in picking up unsecured and credit card loans thro their portal, as transaction costs are negligible but the rate of return is quite high (ranges between 18-36%). Corp loans and secured retail loans (home, mortgage and auto loans) are extended to well informed sections of the society, who demand for finer rates, as otherwise they will be taken away by the competitors waiting outside. That is not the case when the loan is extended as unsecured with easy to avail online procedures for the consumers. As the 'credit not available' underserved population is huge, paying thro EMI to purchase consumer and electronic goods has become a norm in the society,  every regulated/unregulated entity is able to pick up its share quite easily through digital lending methods. 

Few questions needs to be answered when the committee finalises its report.

 1. Volumes are high but more than 90% of the loans are for small values. The loans are given to people upcoming 'hand to mouth survivors' with no or limited 'past credit' record. Charging them interest in excess of 18 percent, when the established and secured players enjoy loans at less than 10% is not fair. The minimum spread between secured and unsecured is so huge that every lender is tempted to jump into  the 'digital lending wagon'. As per FSR, the average yield on advances of SFBs has gone up from 18% to 20%. Obviously, the yield of other regulated MFIs will be still higher. When loans associated with productivity cannot meet higher interest rates, how personal loans associated with consumption could meet EMIs that will result in repaying more than 150-200% of the loan availed. The huge unregulated entity crowd in the digital lending is due to 'no' or 'flexible high' ceiling on interest rates. RBI has linked the maximum interest that can be charged by regulated entities to the average of top three banks' base rate.  Since base rate, an internal bench mark rate, need not reflect the policy rate changes, the maximum interest that can be charged by regulated entities should be linked to Repo rate. (preferably all in cost not to exceed 12-15% over REPO). 

2. One fails to understand why the mobile app should be permitted to access all contacts and other personal data, when the required information like aadhaar, PAN, salary details, name of the employer, bank account number, check-off or otherwise are already part of the filled in application and the agreement, executed online. Apps should be denied this facility of accessing details in the mobile or e-mail. 

3. Recovery methods still require constant monitoring, as harsh methods resulted in the borrower getting humiliated. Every regulated entity should publish in its website its recovery policy and this should be part of sanction letter given to the borrower online.

V.Viswanathan

23rd January 2021