Banking Issues

Banking status

• 1970 PSB frontrunner in mobilizing growth
• Mobilize & pool saving
• Monitor & influence firm to use resource efficiently 
• Help mitigate risk associated with firm etc
• Facilitate transaction in eco 

Issues

• Poor asset quality 
• Bank governance
• Lack of monetary policy transmission 
• Bank consolidation vs diversification (niche)

Asset quality/ NPA problem

• Ecosurv19-20 - performance of PSB & other improved
• GNPA - schedule commercial bank reduced - 10.1%
• Capital to risk-weighted asset ratio  - Increased to 14%
• GNPA of NBFC - Increased to 6.5%
• Stressed asset = NPA + written off asset + Restructured loan 
• Restructured loan = longer duration of repayment, lowering interest rate, conversion to equity  
• Written off - not counted as dues, recovery effort at branch level, clean up balance sheet
• NPA - loan/advance for which principle/interest payment remain overdue for period >90 days
• Agri NPA - short duration crop (2 crop season), long-duration crop (interest not paid for 1 crop season)
• Substandard A- Remain NPA <= 12 months
• Doubtful A - remain substandard <= 12 month
• Lost asset -considered uncollectable , x value 

Causes 

• Borrower side - wilful default, econ slowdown, reduction in demand, fund diversion, global turmoil, volatility in raw material, shortage of power, fugitive borrower 
• Bankside - an absence of regular industrial visit, poor credit appraisal sys, bad lending practice - loan to bad credit history 
• Other - Ineffective recovery tribunal, natural calamities, govt policy fluctuation, admin hurdles, delayed clearances

4 R strategy

• Recognize 
• NPA transparently 
• Asset Quality Review & joint lender's forum 
• Legal entity identifier from borrower to ……
• Standing com finance make public 30 wilful defaulter
• Resolving & recovering
• IBC - corporate insolvency resolution process
• Banking Regulation Act,  1949 to empower RBI
• Amendment in SARFAESI act
• Pro Sashakt ? - resolve NPA by market-led approach
• Recapitalizing 
• GOI recap of PSB - 2.11 lakh crore 
• Deposit with banking sys - Increase aggregate deposit 
• Implementation of BASEL III
• Reform 
• Mission Indra Dhanush - comprehensive framework to transform PSB
• Fugitive Eco offender Act,2018, 11 PSB under PCA
• Consolidation, PSB created stressed asset management verticals
• Alignment of regulatory & supervisory framework of NBFC with SCBS

• Implication of 4R - 
• Increased profitability & liquidity, credit offtake,
• Faster MP transmission, 
• Credit to MSME, middle class, etc, 
• Cost of capital decreased, 
• Business financial viable, sustainable,
• Capital intensive growth, employment 
• WF -  
• better process of project evaluation - expert
• managing risk - like cyber risk 
• compliance not adequate,   
• strengthen recovery process, 
• timely infusion of capital, 
• strengthen the corporate bond market (Khan com)

IBC Insolvency & bankruptcy Code

• NCLT, DRT, CoC
• IB board of India- regulated IUs, IPs, IPAs
• SC - intelligible difference (FC imp than OC) 
• EODB ranking 

Success 

• Resolution time - 4.3 y (wb) to 270 d (180 + 90)

• 1300 case in NCLT, 4500 case disposed pre-admin  stage, Revival= Liquidation (270)

• RBI - 12 large acc - Bhushan steel 

• Operational creditor empowered, Real estate buyer - financial creditor,  

• Sec29a - wilful defaulter, promoter prohibited in the resolution process

• Essar Steel case

Challenge

• Cross border I& B - x UNICITRAL - model law on I&B 

• Infra , Incereased litigation , biased against liquidation (>270 )

• Substantive issue being sorted out - sec29a (small exempted )

• ED attachment - complicate land holding

NFRA

• Failure of ICAI spot corporate frauds
• Companies Act, 2013 provided for NFRA
• Oversee audit of bank, insurers, electricity firm, >500cr paid up 
• Refer erring auditor to quality review board CA act
• Ind eligible - Int Forum for independent Audit regulator IFIAR - share know, BP, audit quality
• Corporate gov, ICAI focus on Edu & training

Insider training 

• TK Vishwanathan com put by SEBI
• Buying /selling of security by a person on non-public info
• Better position to make a bigger gain
• Unfair to other investors, illegal in order to maintain trust & confidence 
• SEBI(Insider training) Regulation, 1992
• Companies Act, 2013

SEBI mech to counter IT

• Responsibility of promoter if they possess unpublished price sensitive info (UPSI) w/o legitimate purpose
• Defining insider , legitimate purpose
• Digital database - name of person with whom info shared

Issues

• Lack of manpower(Kotak com corporate governance)
• Evolving tech 
• Lax implementation 

CRA

• SEBI tightened disclosure norms after NBFC failure 
• probability of default 
• disclose liquidity position 
• check asset - liability mismatch 
• public historic avg rating transition rate
• Imp (ICRA, CARE, CRISIL- resindex) - 
• retail & inst investor rely on info 
• overall idea of strength & stability of org
• trust btn investor & govt (sovereign rating)
• Strengthen secondary market 
• Increases borrowing 
• Issues
• Conflict of intrest -issuer pay model 
• non-rating services - risk consulting , fund research ,
• oligo plastic - x completion , 
• high barriers of entry for new CRA 
• Poor rating qualities - on limited info
• Lack of independence of rating committee

• Solutions
• Subscriber pay model 
• High technology predictive modelling
• Cursory disclosure of all rating by cra , discourage rating shopping 
• Legal protection to CRA - sued by companies
• Mandatory rotation of CRA

Fugitive Eco offender Act 

Mutual Funds

• Franklin Tempton - closure of Credit risk fund
• invested in high-risk companies, less than AA rating
• Mostly SMEs, operation hurt due to lockdown
• Loss of confidence among investor rush to withdraw funds
• RBI action
• meeting liquidity need through Banks 

NBFC

• NBFC registered under Companies act, 1956, engage in business of loan advances acquisition of share/stocks/bonds/securities or other marketable security like chit fund & insurance, x agri, industrial, sale & purchase of good act
• SYS imp NBFC -ILFS, RECI, PFCL
• Can’t accept demand deposit 
• No CRR, lower SLR (15%), 
• x cheque issuing
• X part of payment & settlement sys
• Deposit insurance facility not available 
• RBI allowed partial credit enhancement (PCE) to bonds issued by systemically imp non deposit taking NBFC & Housing finance corp
• Credit enhancement - improving credit rating of corporate bond by assurance of repayment by another entity 
• To ensure confidence return in market 
• Issues
• Multiple regulatory Auth (RBI, NHB, SEBI, IRDAI)
• Difficulty in access to credit - liquidity crunch
• Asset - liability mismatch (borrow for 3-5 y & lend for long tenure - 10 -15 y)
• Investor (MF mostly ) reluctant post ILFS crisis
• Riskier lending - x cautious, increasing unsecured small, micro loan 
• Proj stall - statutory approval , land acquisition, enviro clearance
• Step taken 
• Relaxation of liquidity coverage ratio by 2% - bank can now lend as deposit base free
• OMO - rbi buying govt Bond - to Increase liquidity
• Relaxing asset securitization Norms - can sell /securitize loan .5y maturity after 6 month
• WF-Timely project clearance - plug & play 
• FSLRC -> common body to monitor risk across sector 

ILFS

• ILFS crisis -conglomerate fund infra project National & Int, Systematically imp non-deposit core investment company, major grp like LIC, HDFC, SBI have stakes, 
• 1.15 lakh crore assets
• defaulted on loan payment
• Borrowing mismanaged 
• Rapid debt build-up
• very high leverage,
• Financial mismanagement,
• -ve cash flow,
• Despite crisis, high dividend paid 
• MCA, SFIO probe on, management change 
• RBI - encourage securitization of asset held by NBFC
• Revisit lending restriction under pCA
• Special window for MF to get refinance against collateral  - coordinate & consultive approach
• Imp
• Financial inclusion deeper reach in rural - NABARD ,
• Investment in cap market - 16 %
• Infra financing
• Credit provider when bank credit slows

Bank consolidation 

• Merged 10 bank into 4 large banks
• Ind 3rd largest bank - Bank of Baroda + vijaya bank + Dena bank (amalgamated - combination- new ent 
• 2017 -  SBI + 5 associate bank + bhartiya mahila bank (merger - 1 company acquire other) 
• Narashimham com -1992 - 3 tier restructuring 
• 3-4 large bank (global presence), 8-10 N level ,
• PJ Nayak - privatize or merge , BBB

• Setback to corporate governance Principles 
• Why
• Too many PSB - 21 cannibalise each other business
• strong bank absorbing weaker Bank NPA
• Increases business, customer base, market reach , services
• Global bank - ind bank smaller than global peers
• Reduce ops cost, redundancies & duplication, 
• Enhance geographical reach - Vijaya Bank (south), Bank of Badodra west
• Create capital & liquidity (meet BASEL III norms)
• Employee welfare, disparity of wages reduce
• HR - expertise, efficiencies 

Credit creation

• Commercial bank by advancing loans & purchasing securities 
• Factor limiting 
• Amount of cash in form of public deposit 
• CRR
• banking habits 
• Business condition - depression phase etc,
• leakages in credit creation - outflow of money
• sound securities
• excess reserves,
• behaviour of other bank 
• eco climate 
• liquidity preference 

Credit control 

• Quantitative control -
• Repo rate
• CRR - cash Reserve ratios 
• SLR
• OPO / OMO ? 
• Bank rate - discontinued 
• • Qualitative control 
• Margin requirement 
• Consumer credit regulation - down payment , 
• RBI guideline - oral , written , appeals , warning
• Moral suasion 
• PSL