Banking is an inherently hugely profitable business. To get a sense, all that one needs to do is to look at the hundreds of thousand crore that a bank gets in savings account on which it pays a meager 3.5%-4% interest and earns a minimum of 10% by lending. Even on the funds it garners by way of term deposits [6.25%-7.5% depending on period], there is room for making good money. Yet, Indian banks especially public sector banks [PSBs] have posted huge losses in recent years leading to corresponding erosion in their capital and resultant impairment in their capacity to continue with lending. 11 out of a total of 21 PSBs were even put under Prompt Corrective Action [PCA] framework...
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Category: PSU reforms & dis-investment
Is Modi laying siege on RBI?
The detractors of prime minister, Modi who leave no stone un-turned in lambasting his government for allegedly infringing on the autonomy of the Reserve Bank of India [RBI] -some even allege that the former is hell bent on destroying the latter – should consider the following:- In the wake of the steep increase in non-performing assets [NPAs] of public sector banks [PSBs] rendering them financially weak, the apex bank has brought – 11 PSBs out of a total of 21 – under the Prompt Corrective Action [PCA] framework. A bank is put under PCA when any of the three parameters viz. capital to risk (weighted) asset ratio [CRAR] [or CAR as it is known in common parlance], net-NPAs and return on...
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Banks have recovered Rs 3 trillion – courtesy, IBC
This is election season. Almost every day, in the rallies, the air resonates with allegations [leveled by the President of the grand old party, Congress] of Modi – government letting a couple of his alleged industrialist friends swindle over Rs 300,000 crore of money belonging to the public sector banks [PSBs]. The purported reference is to the money owed by the industrialists to the PSBs which they did not pay back and turned into non-performing assets [NPAs]. According to Rahul Gandhi, Modi has allowed them to go scot free. This is bizarre! The NPAs are the offshoot of indiscriminate lending during 2008-2014 [when Congress was in command] by PSBs to those patronized by the rulers without conducting due diligence. The...
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RBI applying brakes when banks need push
A major contentious issue amidst stand-off between the Reserve Bank of India [RBI] and the union government [this had reached a brink prior to the meeting of RBI board on November 19, 2018 but a showdown was averted due to some flexibility shown by both the sides at the last minute] was in regard to the Prompt Corrective Action [PCA] framework for the weak public sector banks [PSBs]. In the wake of the steep increase in the NPAs [non-performing assets] of the PSBs resulting in their capital erosion, the apex bank has brought 11 PSBs – out of a total of 21 – under the PCA framework which it made stiffer than even the global standards. Thus, it uses three...
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Dealing with NPAs – ‘Project Sashakt’ will weaken banks
A legacy problem that continues to haunt Modi – government is high non-performing assets [NPAs] of public sector banks [PSBs]. Swept under the carpet for several years by the erstwhile UPA regime, it has acted with alacrity in recognizing the NPAs and created a robust architecture for resolving them in a time bound manner. It enacted the Insolvency and Bankruptcy Code [IBC] [December 2016]. Superseding all existing laws on bankruptcy [those were ‘piecemeal’ and lacked ‘bite’], this is a holistic legislation that forces the banks and judicial bodies into prompt action. It has made amendment in Banking Regulation Act [BRA] arming the Reserve Bank of India [RBI] with requisite powers to give directions to banks for making reference to the...
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Robbing policyholders to pay depositors
The IDBI Bank – a public sector bank [PSB] in which the Government of India [GOI] holds 80.96% shareholding – is in deep financial trouble with non-performing assets [NPAs] as a percentage of the borrowings reaching a high of 28% as on March 2018. Despite infusion of Rs 10,600 crore in 2017-18 for its recapitalization, the capital adequacy ratio [CAR] is barely close to the minimum required 9%. In the budget for 2016-17, the government had announced its intent to divest majority stake and transfer control to a private promoter. After dilly dallying on this for over two years, the government has now taken a U-turn and decided to let Life Insurance Corporation [LIC] hike its stake in IDBI Bank...
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Defaulters queue up to return loans, courtesy IBC
The surge in non-performing assets [NPAs] of banks particularly during the last two years and steep increase in their losses due to higher provisioning requirements [during the last quarter of 2017-18, 25 banks have reported a loss of about Rs 50,000 crore] has been a big negative for the Modi – dispensation as it completes 4 years of its term. True, it is a legacy problem from the previous UPA – dispensation when banks generously gave loans to favored persons [who enjoyed clout with the political establishment and bureaucrats] many a times without conducting due diligence and assessing viability of the projects and there was little or no follow-up on recovery. In fact, the banks went an extra mile giving...
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GST/Demonetization/IBC – the trio behind inclusive growth
While, presenting the budget for 2017-18, the finance minister, Arun Jaitely had fixed a target of Rs 9.8 lakh crore for collection of direct tax. Against this, the government has already touched Rs 9.95 lakh crore and is expected to reach Rs 10 lakh crore by the time figures for the last few days of March, 2018 get confirmed. Under the Goods and Services Tax [GST] rolled out on July 1, 2017, out of total collection of Rs 7.20 lakh crore till February, 2018, centre’s share is Rs 4.60 lakh crore which is Rs 16,000 crore higher than the target [Rs 4.44 lakh crore]. This is despite the fact that various tax evasion and safety measures such as electronic-way [e-way]...
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Bank loot – humans fail systems not vice versa
In the wake of over Rs 13,000 crores fraud perpetrated by Nirav Modi and Mehul Choksi on Punjab National Bank [PNB] – second largest public sector bank [PSB] – the Reserve Bank of India [RBI] has barred banks from issuing letters of undertaking [LoUs] and letters of comfort [LoCs] with immediate effect. However, it has allowed banks to continue to issue letters of credit [LCs] and bank guarantees [BGs]. The decision has caused consternation in industry circles who argue that this move will cause a big disruption in trade financing [as LoUs/LoCs currently account for about US$ 20-40 billion worth of outstanding finance] and raise credit costs for importers. In a country ridden with a flood of scams, it is...
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Scam tainted PSBs – is privatization the way forward?
In the wake of Punjab National Bank [PNB] mega scam in which it has lost a mammoth Rs 13,000 crore [about US$ 2 billion] and bunch of other public sector banks [PSBs] related scams, commentators have resurrected the idea of privatizing PSBs. The NDA-government under the then, prime minister Vajpayee [1998-2004] had mooted union government relinquishing majority control [it implies lowering of its share holding to less than 50%] in PSBs initially and eventually to 33%. Recently, a committee set up by the Reserve Bank of India [RBI] under P Nayak also recommended reducing its share to below 50% and housing the residual shares in a holding company. But, finance minister, Arun Jaitely even while expressing serious concern over proliferating...
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