Sunday, December 25, 2011
Spike in bad loans worries RBI
MUMBAI: Bad loan growth in Indian banks this year has been over thrice the average growth in the preceding five years. While most bad loans are in retail, priority sector and infrastructure, RBI is worried about the power sector which is going through a high level of stress.
RBI on Thursday released its Financial Stability Report, which assess the ability of the financial sector to survive various types of stress. The stress test results show that bad loans will reduce bank profits and may also force some of them to raise capital. Besides rising bad loans, the financial system could come under stress because of a falling rupee and fleeing foreign investors.
RBI's stress test shows that if bad loans were to increase 150%, 20 banks representing 46% of bank lending in India would be forced to seek capital support as their core capital adequacy would fall below the prescribed 6%. Considering that gross non-performing assets of banks were at 2.01% in March 2011, a 150% increase would translate to a gross NPA ratio of 5.02%.
"If GDP growth slows down, there could be some downstream impact on asset quality. At the same time, additional capital will need to be raised due to the compulsions of implementation of Basel III, a growing (albeit at a potentially decelerated rate) economy and financial inclusion," the RBI report said.
The central bank's warning comes at a time when the country's largest lender State Bank of India is awaiting capital infusion from the government to bring its tier-one capital adequacy to over 8%. However, SBI will not be among those whose capital will be impaired even in the worst case scenario for bad loans.
According to RBI, slippages (good loans that have turned bad) has outpaced credit growth and have grown 92.8% (year on year) as on end-September 2011. Although the share of infrastructure is relatively lower than retail or priority sector loans, RBI has warned that there is high level of impairments and restructuring in power. "With losses among state electricity boards and coal supply issues faced power projects, high concentration of bank credit in power generation is a matter of concern," RBI said.
Margins of public sector banks will be the worst affected if they respond to competitive pressures from their private peers on savings account rates.
RBI's observation comes at a time when private sector lender Yes Bank has taken the rate war further by hiking its savings deposit rate to 7% from 6% earlier. Most large banks continue to offer 4% while some banks with lower share of current and savings account such as Kotak Bank are offering 6%.
According to RBI calculations, PSU banks will see their margins shrink by over 22 basis points as against private banks whose margins will shrink by only 15-17 basis points. RBI has said that after deregulation of the savings rate, some churn in customers can be expected. But for PSU's it is a difficult situation as they stand to lose more than private banks if they raise deposit rates.
While falling interest rates may ease the pressure, banks are seeing a rate war in the non-resident external (rupee) deposits. On Thursday, HDFC Bank increased its NRE deposit rates by over 2.5 times to 9%.
Sarfaesi laws may lessen banks' bad loan burden
Avinash Celestine, ET Bureau Dec 23, 2011, 03.22am IST
NEW DELHI: Banks will be allowed to take property seized from defaulting borrowers onto their own books, or in effect 'buy' the asset they sequester, thus reducing their non-performing loans, according to a revised securitisation law awaiting parliamentary sanction.
In effect, this would allow banks to clean up their books but at the risk of being saddled with an asset worth far less than what the bank paid for it.
This change, which forms a part of the proposed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi), introduced last week, comes at a time when banks face the risk of rising non-performing loans, and of being saddled with property seized from borrowers unable to pay back their loans.
Worse, a weak property market means that banks may be unable to find buyers for the property they have seized — at least at the price they want.
The same set of amendments also propose to give the finance ministry wide-ranging powers to notify certain types of banks to whom the provisions of Sarfaesi will not apply, or apply only with certain 'exceptions, modifications and adaptations'.
It also brings multi-state co-operative banks within the ambit of Sarfaesi and allows asset reconstruction companies (ARCs) to convert debt into equity as part of a restructuring. At present, Sarfaesi allows banks and ARCs to seize assets from loan defaulters, which in many cases include immoveable property. Banks then typically hold an auction to sell the property.
However, if a bank is unable to find buyers willing to bid above the reserve price, or the minimum bid amount, it currently has little option but to postpone the auction to a future date, and hope for a better bid.
Under the proposed changes, in case of a failed auction, the bank can depute one of its own officers to bid for the property at the reserve price at any future auction. If there are no other bidders yet again, or the bank's own bid is the highest, the property stands 'sold' to the bank. Under current law, a bank is not allowed to bid for property it puts up for auction.
"This is allowed under the Civil Procedure Code and the incometax recovery laws," said MR Umarji, chief advisor-legal, Indian Banks' Association. The changes also apply to ARCs.
NEW DELHI: Banks will be allowed to take property seized from defaulting borrowers onto their own books, or in effect 'buy' the asset they sequester, thus reducing their non-performing loans, according to a revised securitisation law awaiting parliamentary sanction.
In effect, this would allow banks to clean up their books but at the risk of being saddled with an asset worth far less than what the bank paid for it.
This change, which forms a part of the proposed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi), introduced last week, comes at a time when banks face the risk of rising non-performing loans, and of being saddled with property seized from borrowers unable to pay back their loans.
Worse, a weak property market means that banks may be unable to find buyers for the property they have seized — at least at the price they want.
The same set of amendments also propose to give the finance ministry wide-ranging powers to notify certain types of banks to whom the provisions of Sarfaesi will not apply, or apply only with certain 'exceptions, modifications and adaptations'.
It also brings multi-state co-operative banks within the ambit of Sarfaesi and allows asset reconstruction companies (ARCs) to convert debt into equity as part of a restructuring. At present, Sarfaesi allows banks and ARCs to seize assets from loan defaulters, which in many cases include immoveable property. Banks then typically hold an auction to sell the property.
However, if a bank is unable to find buyers willing to bid above the reserve price, or the minimum bid amount, it currently has little option but to postpone the auction to a future date, and hope for a better bid.
Under the proposed changes, in case of a failed auction, the bank can depute one of its own officers to bid for the property at the reserve price at any future auction. If there are no other bidders yet again, or the bank's own bid is the highest, the property stands 'sold' to the bank. Under current law, a bank is not allowed to bid for property it puts up for auction.
"This is allowed under the Civil Procedure Code and the incometax recovery laws," said MR Umarji, chief advisor-legal, Indian Banks' Association. The changes also apply to ARCs.
Axis Bank, SBI, ICICI Bank, PNB stock futures crash on rising bad loans & high rates
Nihar Gokhale, ET Bureau Dec 20, 2011, 07.00am IST
MUMBAI: Futures prices of select bank stocks crashed on Monday as fears of rising non-performing loans and high interest rates turned sentiment against the sector.
While bank stocks in the cash market have been touching record lows over the past week, investors offloaded long positions and went short on contracts of large banks like SBI, ICICI Bank, Axis Bank and Punjab National Bank.
At the end of trading hours on Monday, Axis Bank stock futures closed at Rs 835.55, at a significant discount of Rs 15 to the underlying cash price, which hit a 52-week low of Rs 850.65. Axis has been hit by heavy short selling since Friday, when a record 20% addition in open interest positions was accompanied by widening discounts.
"There was a combination of short selling and reduction in long positions, as those overweight on the banking sector cut down on their holdings," said Monal Desai, VP and head – institutional equities (derivatives) at broking house Prabhudas Lilladher.
State Bank of India saw a cut-down in over 1.3 lakh positions in open interest. The contract closed at Rs 1,626.85, down 2.6%. A discount of Rs 10 in early trade shrank to zero later in the day which means that traders closed their short positions. Likewise, ICICI Bank open interest reduced by 2.3 lakh, while the contract price declined by 2.3% to Rs 659.90.
Some of these banks also have huge exposure to the weak power and infrastructure sectors, worrying investors about a possible rise in the number of bad loans. "Large banks always have a large exposure to the corporate sector. When you've an overall negative sentiment, the same will spread to the large banks," said Saday Sinha, analyst at Kotak Securities.
Other stock futures facing the heat were Punjab National Bank, which closed at 3.5% down at Rs 790, and a discount of Rs 5 to the underlying stock.
Shares of large banks, both private and public sector, have plunged in recent days with ICICI Bank and HDFC Bank dipping to their 52-week lows of Rs 641 and Rs 400.25 on Monday.
SBI also slumped to its 52-week low Rs 1,598. SBI too hit a 52-week low of Rs 1,598, accompanied by a large pack of other public sector banks like Canara Bank, Punjab National Bank, Bank of Baroda, Union Bank of India, Indian Overseas Bank, among others. Bank Nifty index too touched its 52-week low of 7,801 on Monday.
But it was Axis Bank which continued to face the maximum heat, at least in futures trading. It continues to trade at a discount of Rs 15. The contract saw 20% addition in open interest on Friday, leading to a record high of over 90 lakh positions. While 6.8 lakh open interest was added on Monday, the total hovered around 90 lakh. This indicates both short selling and exiting in long positions.
Amit Gupta, head, derivatives, ICICI Direct advised clients in a morning strategy report to go short on Axis Bank futures, and long on Bank Nifty. This means Axis Bank may underperform Bank Nifty during the life of the strategy.
MUMBAI: Futures prices of select bank stocks crashed on Monday as fears of rising non-performing loans and high interest rates turned sentiment against the sector.
While bank stocks in the cash market have been touching record lows over the past week, investors offloaded long positions and went short on contracts of large banks like SBI, ICICI Bank, Axis Bank and Punjab National Bank.
At the end of trading hours on Monday, Axis Bank stock futures closed at Rs 835.55, at a significant discount of Rs 15 to the underlying cash price, which hit a 52-week low of Rs 850.65. Axis has been hit by heavy short selling since Friday, when a record 20% addition in open interest positions was accompanied by widening discounts.
"There was a combination of short selling and reduction in long positions, as those overweight on the banking sector cut down on their holdings," said Monal Desai, VP and head – institutional equities (derivatives) at broking house Prabhudas Lilladher.
State Bank of India saw a cut-down in over 1.3 lakh positions in open interest. The contract closed at Rs 1,626.85, down 2.6%. A discount of Rs 10 in early trade shrank to zero later in the day which means that traders closed their short positions. Likewise, ICICI Bank open interest reduced by 2.3 lakh, while the contract price declined by 2.3% to Rs 659.90.
Some of these banks also have huge exposure to the weak power and infrastructure sectors, worrying investors about a possible rise in the number of bad loans. "Large banks always have a large exposure to the corporate sector. When you've an overall negative sentiment, the same will spread to the large banks," said Saday Sinha, analyst at Kotak Securities.
Other stock futures facing the heat were Punjab National Bank, which closed at 3.5% down at Rs 790, and a discount of Rs 5 to the underlying stock.
Shares of large banks, both private and public sector, have plunged in recent days with ICICI Bank and HDFC Bank dipping to their 52-week lows of Rs 641 and Rs 400.25 on Monday.
SBI also slumped to its 52-week low Rs 1,598. SBI too hit a 52-week low of Rs 1,598, accompanied by a large pack of other public sector banks like Canara Bank, Punjab National Bank, Bank of Baroda, Union Bank of India, Indian Overseas Bank, among others. Bank Nifty index too touched its 52-week low of 7,801 on Monday.
But it was Axis Bank which continued to face the maximum heat, at least in futures trading. It continues to trade at a discount of Rs 15. The contract saw 20% addition in open interest on Friday, leading to a record high of over 90 lakh positions. While 6.8 lakh open interest was added on Monday, the total hovered around 90 lakh. This indicates both short selling and exiting in long positions.
Amit Gupta, head, derivatives, ICICI Direct advised clients in a morning strategy report to go short on Axis Bank futures, and long on Bank Nifty. This means Axis Bank may underperform Bank Nifty during the life of the strategy.
Shorts surge on ICICI Bank on bad loan fears
Nihar Gokhale, ET Bureau Dec 14, 2011, 01.29am IST
MUMBAI: Traders mounted their bearish bets on ICICI Bank on Tuesday, taking cues from the plunge in its American Depository Receipt (ADR) the previous night, as they speculated that the private lender's bad loans may increase with the Indian economy weakening.
Short positions in ICICI Bank stock futures surged after the five-year credit-default swaps (CDS) on the lender rose 88 basis points to 483 points in a week--one of the fastest increases among Asian banks.
ICICI December stock futures, which closed at Rs 708 against the share price of Rs 709.30, added around 4,500 contracts in open interest. While the contract was trading at a premium of almost Rs 4 for most of the day, it slipped into a discount of Rs 1 at close. ICICI Bank shares hit a 52-week low of Rs 690.25 earlier in the day.
"It is the largest private sector bank and when sectors like power, infrastructure and aviation are stressed, it is bound to increase worries about asset quality," said Saday Sinha, analyst at Kotak Securities.
ICICI Bank's CDS —the cost of insuring debt of the lender against non-payment— is still 13 points away from the record level of 496 on October 10. The country's largest lender State Bank of India's CDS, which has risen 43 basis points to almost 370 points, is about 26 points away from the high of 396 in October.
Analysts said the sudden pessimism about ICICI Bank has resulted in traders incurring losses in a trading strategy involving SBI. Many derivatives traders have been selling SBI contracts and buying ICICI Bank contracts, as part of a pairtrade strategy. They expected SBI to outperform ICICI Bank.
"There have been renewed concerns over ICICI Bank, and this is unlike a few weeks ago when it was trading at comfortable levels. Its correlation with SBI futures has been disturbed," said a derivatives head of a Mumbai-based institutional brokerage, who declined to be named.
A recent study by IDBI Capital Market shows the estimated Corporate Debt Restructuring (CDR) referrals of ICICI Bank in the second quarter of 2011-12 was Rs 1,170 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
"Our estimated Q2FY12 CDR referral as a percentage of cumulative restructured assets for some of the banks is quite high. This estimated CDR amount is likely to have been referred in Q2FY12, so banks are staring at atleast this amount for conversion to either restructured assets or NPAs in coming quarters," said Sandeep Jain, analyst at IDBI Capital, in a client note.
Some analysts are less worried about the likelihood of the surge in bad debts of Indian banks. "There are asset quality issues and if people are worried about it, then it is rightly so. But, we are of the view that Indian banks, and especially ICICI, will manage these asset issues well.
Here, the question is whether there will be earnings growth or not," said Rajat Rajgarhia, head – institutional research at Motilal Oswal Financial.
MUMBAI: Traders mounted their bearish bets on ICICI Bank on Tuesday, taking cues from the plunge in its American Depository Receipt (ADR) the previous night, as they speculated that the private lender's bad loans may increase with the Indian economy weakening.
Short positions in ICICI Bank stock futures surged after the five-year credit-default swaps (CDS) on the lender rose 88 basis points to 483 points in a week--one of the fastest increases among Asian banks.
ICICI December stock futures, which closed at Rs 708 against the share price of Rs 709.30, added around 4,500 contracts in open interest. While the contract was trading at a premium of almost Rs 4 for most of the day, it slipped into a discount of Rs 1 at close. ICICI Bank shares hit a 52-week low of Rs 690.25 earlier in the day.
"It is the largest private sector bank and when sectors like power, infrastructure and aviation are stressed, it is bound to increase worries about asset quality," said Saday Sinha, analyst at Kotak Securities.
ICICI Bank's CDS —the cost of insuring debt of the lender against non-payment— is still 13 points away from the record level of 496 on October 10. The country's largest lender State Bank of India's CDS, which has risen 43 basis points to almost 370 points, is about 26 points away from the high of 396 in October.
Analysts said the sudden pessimism about ICICI Bank has resulted in traders incurring losses in a trading strategy involving SBI. Many derivatives traders have been selling SBI contracts and buying ICICI Bank contracts, as part of a pairtrade strategy. They expected SBI to outperform ICICI Bank.
"There have been renewed concerns over ICICI Bank, and this is unlike a few weeks ago when it was trading at comfortable levels. Its correlation with SBI futures has been disturbed," said a derivatives head of a Mumbai-based institutional brokerage, who declined to be named.
A recent study by IDBI Capital Market shows the estimated Corporate Debt Restructuring (CDR) referrals of ICICI Bank in the second quarter of 2011-12 was Rs 1,170 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
"Our estimated Q2FY12 CDR referral as a percentage of cumulative restructured assets for some of the banks is quite high. This estimated CDR amount is likely to have been referred in Q2FY12, so banks are staring at atleast this amount for conversion to either restructured assets or NPAs in coming quarters," said Sandeep Jain, analyst at IDBI Capital, in a client note.
Some analysts are less worried about the likelihood of the surge in bad debts of Indian banks. "There are asset quality issues and if people are worried about it, then it is rightly so. But, we are of the view that Indian banks, and especially ICICI, will manage these asset issues well.
Here, the question is whether there will be earnings growth or not," said Rajat Rajgarhia, head – institutional research at Motilal Oswal Financial.
Tuesday, December 13, 2011
Govt tables Amendment Bill to deal with recovery of bad loans
The government on Monday introduced an Amendment Bill in Parliament to
enable banks and financial firms to effectively deal with the problem of
bad loans.
The move could help bring down lending rates for home and corporate loans, experts said. Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was introduced by minister of state for finance Namo Narain Meena in the Lok Sabha, seeks to strengthen recovery process of secured loans.
It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.
The amendment in SARFAESI Act will "provide for conversion of any part of the debt into shares of a borrower company and such conversion shall be deemed always to have been valid as if the provisions of said conversion were in force at all material times."
Besides, it seeks to bring multi-State cooperative banks under the category of the bank.
At the same time, it will enable to increase the period of response to be sent by the banks or financial institutions to the representation of the borrowers to 15 days from 7 days.
It will also empower banks or financial institutions to accept the immovable property in full or partial satisfaction of the claims of the bank against the defaulting borrower.
The amendment will allow district magistrate or the chief metropolitan magistrate to authorise any subordinate officer to take possession of assets or forward assets to the secured creditors.
The Bill has also proposed to amend the RDBF Act 1993 that among other things would "enable the banks and financial institutions to enter into settlement or compromise with the borrowers and also to empower
Debts Recovery Tribunals to pass an order acknowledging such settlement or compromise."
It also seeks "to permit the multi State Cooperative banks, with respect to debts due before or after the commencement of the proposed legislation, to opt either to initiate proceedings under the the Multi-State Co-operative Societies Act 2002 or to initiate proceedings before the Debt Recovery Tribunal."
To ensure expeditious adjudication and recovery of dues of banks and financial institutions, remove legal anomalies and strengthen the Recovery Tribunal, the RDBF Act was amended in the years 1995, 2000 and 2004, the Bill said.
"Once the Bill is cleared, procedural changes in loan recovery is expected to lower the cost of funds for borrowers," Ernst & Young partner Ashvin Parekh said, adding that risk premium on secured loans will soften.
The move could help bring down lending rates for home and corporate loans, experts said. Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was introduced by minister of state for finance Namo Narain Meena in the Lok Sabha, seeks to strengthen recovery process of secured loans.
It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.
The amendment in SARFAESI Act will "provide for conversion of any part of the debt into shares of a borrower company and such conversion shall be deemed always to have been valid as if the provisions of said conversion were in force at all material times."
Besides, it seeks to bring multi-State cooperative banks under the category of the bank.
At the same time, it will enable to increase the period of response to be sent by the banks or financial institutions to the representation of the borrowers to 15 days from 7 days.
It will also empower banks or financial institutions to accept the immovable property in full or partial satisfaction of the claims of the bank against the defaulting borrower.
The amendment will allow district magistrate or the chief metropolitan magistrate to authorise any subordinate officer to take possession of assets or forward assets to the secured creditors.
The Bill has also proposed to amend the RDBF Act 1993 that among other things would "enable the banks and financial institutions to enter into settlement or compromise with the borrowers and also to empower
Debts Recovery Tribunals to pass an order acknowledging such settlement or compromise."
It also seeks "to permit the multi State Cooperative banks, with respect to debts due before or after the commencement of the proposed legislation, to opt either to initiate proceedings under the the Multi-State Co-operative Societies Act 2002 or to initiate proceedings before the Debt Recovery Tribunal."
To ensure expeditious adjudication and recovery of dues of banks and financial institutions, remove legal anomalies and strengthen the Recovery Tribunal, the RDBF Act was amended in the years 1995, 2000 and 2004, the Bill said.
"Once the Bill is cleared, procedural changes in loan recovery is expected to lower the cost of funds for borrowers," Ernst & Young partner Ashvin Parekh said, adding that risk premium on secured loans will soften.
Banks may be allowed to accept immovable property to settle claims
Banks and financial institutions may soon be allowed to accept immovable
property in full or partial satisfaction of claims against defaulting
borrowers. A proposal to this effect has been made in a new Bill
introduced in Lok Sabha on Monday to amend the existing Sarfaesi law.
Currently, banks are not empowered to accept immovable property in full
or partial satisfaction of the claim against the defaulting borrower, if
no bidder comes to bid or banks are unable to find a buyer for such
assets. Banks, as secured creditors, are, however, permitted to sell the
securities to realise the defaulted loans.
This Bill — The Enforcement of Security Interest and Recovery of Debt
Laws (Amendment) Bill 2011 — was introduced by Mr Namo Narain Meena,
Minister of State for Finance.
It provides for mandatory registration of all securitisation,
reconstruction and creation of security interest transactions in the
Central registry. All such transactions that are subsisting on or before
the establishment of the Central registry will also have to be
registered, the Bill has said.
The Bill would also enable securitisation firms to convert any part of
debt into shares of the borrowing company. At present, reconstruction or
securitisation firms cannot convert their debt into equity in cases of
business reconstruction, rehabilitation or revival.
Another significant proposal relates to allowing multi-state
co-operative banks to initiate proceedings through debt recovery
tribunals (DRTs). Also, banks or any person will soon be empowered to
file a caveat so that before granting any stay, they are heard by the
DRT.
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (Sarfaesi) was enacted to
regulate securitisation and reconstruction of financial assets and
enforcement of security interest.
Finance ministry pushes banks to fast-track bad loan recovery
Sangita Mehta, ET Bureau Dec 12, 2011, 01.30am IST
MUMBAI: The finance ministry is pushing capital-strapped public sector banks to hasten recovery of bad loans to improve health, and has promised to fill vacancies at debt recovery tribunals (DRT) across the nation, partly responsible for inordinate delays in ending disputes.
"Needless to say that Rs2 lakh crore (of bad loans) are a drag on the capital of banks," a bureaucrat from the finance ministry wrote to bank chairmen recently.
MUMBAI: The finance ministry is pushing capital-strapped public sector banks to hasten recovery of bad loans to improve health, and has promised to fill vacancies at debt recovery tribunals (DRT) across the nation, partly responsible for inordinate delays in ending disputes.
"Needless to say that Rs2 lakh crore (of bad loans) are a drag on the capital of banks," a bureaucrat from the finance ministry wrote to bank chairmen recently.
Central Bank drops pre-closure charges on home loans
New Delhi, Dec 11:
Central Bank of India has decided to waive pre-payment penalties on floating rate housing loans with immediate effect.
“In
deference to the Reserve Bank of India’s suggestions, the bank has
decided to waive penalty on pre-payment of all floating rate housing
loans irrespective of the source of funds of the borrowers,” Central
Bank of India said in a statement.
With this waiver,
there will be no pre-payment penalty on all floating rate housing loans
of the bank for both new as well as existing borrowers, the Central Bank
of India Chairman and Managing Director, Mr M.V. Tanksale, said.
The
Mumbai-based state—owned lender had already waived pre-payment penalty
on foreclosures where the borrowers were making payments from their own
sources.
Last month, State Bank of India and ICICI Bank decided to abolish prepayment penalty.
Housing finance companies has already been barred from charging foreclosure charges.
In
October, the sector regulator National Housing Bank (NHB) directed all
the housing finance companies to desist from imposing a pre-payment
penalty on home loan borrowers.
The levy of charge on
borrowers for pre-closure of housing loans by housing finance companies
has been considered further by the NHB in the light of subsequent
developments and it has been decided that hereafter, housing finance
companies should not charge a pre-payment levy or a penalty on
pre-closure of housing loans, the regulator had said in a notification.
In
addition, the NHB has also directed all the housing finance companies
to have a uniform and not differential rates of interest for old and new
borrowers that have the same credit or risk profile.
Saturday, December 10, 2011
Risks in lease rental discounting loans: Fitch Ratings
Fitch Ratings has come out with its special research report on 'risks in lease rental discounting (LRD) loans'. As per the rating agency the failure to appreciate the inherent risks of LRD loans may leave market participants exposed to stress in commercial rental market in an economic downturn.
Percieved as Less Risky: Lease rental discounting (LRD) loans are widely perceived by lenders to have lower risks than construction loans or direct lending to real estate corporates. The structure of a typical LRD loan ensures relatively higher availability of cash to service the loan and easier access to collateral in the event of default. Furthermore, anecdotal evidence suggests that the performance of such loans has been significantly better than other real estate loans (see Appendix 1: Survey of Institutional Lenders of LRD Loan).
Lenders Underestimate Risks: While LRD loans have a lower risk profile than other real estate loans, most such loans are unlikely to have medium to high investment-grade credit profile. As shown in Fitch Ratings survey (see Appendix 1) in some cases, the pricing of such loans is comparable to the loan pricing of high investment grade corporates. Strong linkage of a typical LRD loan to the corporate owner of the property and a relatively low cash cushion may limit the credit profile of such LRD loans.
Credit Linkage of LRD loans: Long-term lease contracts with high quality corporate tenants provide strong cash flows to service debt, while mechanisms such as rent deposits in an escrow account reduce commingling risk. However, linkage of the LRD cash flows with the credit of the borrower (who is often the owner of the building and is a real estate corporate) remains strong in a many LRD transactions. As such, if the borrower enters into bankruptcy proceedings or debt restructuring, the LRD cash flows would be affected by a time lag.
Low DSCRs: In many transactions, the implied debt service coverage ratio (DSCR) may be lower than the DSCR of similar structures rated investment grade. This is because the typical implied DSCR range of 1.1 to 1.3 seen in Indian LRD loans may not provide a sufficient cushion to debt payments during (even moderate) economic downturns. As such, over the last 10 years the Indian market has experienced downward rent revisions in the range of 10% to 40% (depending on location).
CMBS vis-vis LRD Loans: Significant similarities exist between Indian LRD transactions and CMBS transactions, particularly in the Asia-Pacific region. CMBS transactions with investment-grade ratings usually have a DSCR above that of a typical Indian LRD loan. As such, they are able to withstand much higher volatilities in rental cash flows. However, many CMBS transactions are exposed to refinancing risk at maturity, since the principal is usually not fully amortised.
LRD Loan StructureFitch has been presented with a wide variety of real estate financing structures. In addition to LRD loans, proposals include CMBS and construction-linked loans (also known as progress payments in other jurisdictions). To develop a complete view of the variety of LRD structures in the market, Fitch surveyed market participants.
The typical LRD structure consists of a real estate loan with a charge on a commercial property, along with an assignment of the future lease receivables. Thus the debt obligation is serviced by the rent/lease payments of tenants occupying the commercial property. These features ensure significant cash flow visibility for debt servicing, particularly if the tenants are financially stable corporates and are likely to remain in the property well beyond the initial lock-in period. Additionally, if the lender is a bank, the lender then draws comfort from its ability to enforce security (the underlying commercial property) under SARFAESI Act in the event of default.
Such features result in LRD loans having a relatively lower likelihood of default than a loan extended directly to a real estate corporate. The key structural features of an LRD loan are provided below.
Discounted Rent Value (DRV)The rent contractually received from the tenant (also known as gross rent) is adjusted for taxes, maintenance and other administrative costs to calculate the net rent. Where there are separate payment arrangements by means of a Common Area Maintenance (CAM) agreement between the tenant and the owner, less weight may be given to maintenance and administrative costs. However, while calculating net rent for LRD loans with a tenure greater than five years, not all lenders explicitly consider major maintenance expenses. As such, periodic capital expenditure will likely have a significant impact on cash flows. The net rent, thus calculated, is discounted by the interest rate of the loan over the life of the loan to determine the discounted rent value.
Volatility in Occupancy LevelsCorporate tenants in India typically stay the full term of their contract, owing to lock-in periods (usually three years), high upfront set-up costs (ranging from 18 months to 40 months of rent) and social costs (eg proximity to business partners/customers and employee convenience). To ensure occupancy levels are maintained over the tenure of an LRD loan (particularly loan tenures exceeding five years) it is important to evaluate the attractiveness of the business district and the supply of commercial real estate in the locality. An excess supply of commercial real estate at relatively lower rental rates is likely to result in a downward renegotiation of rents, or an increase in vacancy rates; either would affect the DSCR of an LRD loan.
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
To read the full report click on the attachment
Risks_LRD_Loans_Fitch_091211.pdf
Tuesday, December 6, 2011
Big borrowers of India Inc default on Rs 47,000 crore loans
Pradeep Thakur, TNN | Dec 6, 2011, 04.31AM IST
NEW DELHI: Large borrowers, who took loans of Rs 10 crore or more, have defaulted on payments to the tune of Rs 47,000 crore, with banks not even pursuing cases to recover over half the amount.
Data available with the finance ministry shows that least 700 defaulters who had borrowed Rs 10 crore or more from public sector banks and cumulatively owe over Rs 26,000 crore have gone scot free despite not clearing their dues. In another 3,400 cases where loans are of the order of Rs 1 crore or more, the lenders have moved courts and tribunals to recover Rs 21,400 crore.
But there are still concerns over the way banks are using options such as one-time settlement scheme to recover the dues. Investigations have shown that in several instances, it was not a simple case of default but even cheating was involved. Bank executives failed to attach personal assets of directors of companies that had defrauded the banks, sources said.
NEW DELHI: Large borrowers, who took loans of Rs 10 crore or more, have defaulted on payments to the tune of Rs 47,000 crore, with banks not even pursuing cases to recover over half the amount.
Data available with the finance ministry shows that least 700 defaulters who had borrowed Rs 10 crore or more from public sector banks and cumulatively owe over Rs 26,000 crore have gone scot free despite not clearing their dues. In another 3,400 cases where loans are of the order of Rs 1 crore or more, the lenders have moved courts and tribunals to recover Rs 21,400 crore.
But there are still concerns over the way banks are using options such as one-time settlement scheme to recover the dues. Investigations have shown that in several instances, it was not a simple case of default but even cheating was involved. Bank executives failed to attach personal assets of directors of companies that had defrauded the banks, sources said.
Subscribe to:
Posts (Atom)