Govt may allow higher foreign play in bad asset business

An FII may be allowed to pick up 49% in a bad asset bought by an ARC from a bank from 10% earlier.

Aveek Datta.

Mumbai: The government may raise the level of foreign direct investment, or FDI, in asset reconstruction companies (ARCs) and allow foreign institutional investors, or FIIs, higher investment limits in security receipts (SRs) which such companies typically issue against a pool of bad assets.Both proposals are critical to boost the asset reconstruction business in India at a time when bad loans in the banking system have been on the rise in a slowing economy.

A long-standing demand of the sector, the changes could be part of the government’s budget for 2012 to be presented in Parliament by finance minister Pranab Mukherjee on 16 March.
The finance ministry is considering a proposal to hike the maximum permissible stake a single FII can pick up in a bad asset bought by an ARC from a bank to 49% from 10% earlier, according to two people familiar with the matter. The maximum collective stake that multiple foreign entities can hold in such an asset may also be increased to 74% from 49% earlier, they added. None of them wanted to be identified.
FDI in ARCs can also go up from 49% to 74%. Even though there is no sub-limit within the 49% permissible limit, typically the Reserve Bank of India (RBI) does not allow one single entity to hold more than 10% stake in an ARC currently.
Barring Asset Reconstruction Co. (India) Ltd (Arcil), India’s oldest and largest ARC, none of the other 12 companies in the sector has been able to acquire substantial bad assets from banks due to paucity of funds.
“An advisory group comprising executives of asset reconstruction companies had made a recommendation to the government (for raising the limit of foreign investment),” said Birendra Kumar, managing director and chief executive of International Asset Reconstruction Co. Pvt. Ltd. “It will be a positive development if the government were to allow this.”
RBI and the finance ministry have been discussing both the proposals.
Typically, ARCs set up separate trusts to acquire individual assets. These trusts issue SRs against the bad assets bought. The SRs are bought by banks themselves as qualified institutional buyers, or QIBs, as well as other investors. Banks do ask for upfront payment in cash, too, instead of SRs.
There are several regulatory restrictions put by RBI on the source of funding that ARCs can tap. Out of the available sources, banks, notified financial institutions and non-banking financial companies do not lend much to ARCs. Another source of liquidity for ARCs could have been domestic funds, but there are a very few in India focused on distressed assets.
P.H. Ravikumar, managing director and chief executive of Invent Assets Securitisation and Reconstruction Pvt. Ltd, said that if there were more funds from foreign investors at the disposal of ARCs they would be able to bid for more assets.
“Over the last two years, all the ARCs put together haven’t managed to acquire assets worth more than Rs. 1,000-2,000 crore,” Ravikumar said. “If the limit of foreign investment is increased to these limits, we can buy assets to the tune of Rs. 5,000-7,000 crore.”
Since these foreign investors are minority shareholders at present, they don’t take an active part in the revival of assets. The situation may reverse if they were allowed a sizable stake, Ravikumar added.
ARCs will play a crucial role in reducing the burden of bad loans on banks, at a juncture where non-performing assets (NPA) in the banking system have grown rapidly.
A 6 February Mint analysis of 34 listed banks that had announced their December quarter results showed that their gross NPAs had grown to Rs.76,644 crore, a 30.51% year-on-year increase. The analysis didn’t include NPAs of State Bank of India (SBI) since India’s largest bank was yet to announce its December quarter earnings as on that date. SBI said on 13 February that its NPAs at the end of December touched Rs. 40,098.43 crore, or 4.61% of its total advances, the highest proportion since September 2005.
Many corporate and retail borrowers have been unable to repay debt as economic growth slowed to under 7% this fiscal from 8.4% in the previous one. After declining continuously between fiscal years 1995-96 to 2007-08, the total stock of bad loans has seen a sharp rise, RBI deputy governor Anand Sinha said in February.
“From 15% in 1995, NPAs came down till 2008, but they have risen sharply by 91%, or Rs. 46,670 crore, between 2005-06 and 2010-11,” Sinha said atMint’s annual banking conclave in Mumbai.
Another policy intervention that ARCs have been hoping for to incentivize the effort and resources required to buy and revive a distressed asset is to allow them to covert a portion of the debt attached to it into equity.
At present, there are regulatory restrictions on ARCs picking up a stake and they make money by earning a fee in lieu of managing the trust through which the asset is acquired and the debt, recovered.
Kumar of International Asset Securitisation said that an amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to allow conversion of debt to equity had been moved in the winter session of Parliament in 2011 and is pending before a standing committee.
The SARFAESI Act provides the framework in which ARCs operate.
aveek.d@livemint.com


http://www.livemint.com/2012/03/13125635/Govt-may-allow-higher-foreign.html 

RBI gets tough on prepayment penalty, discriminatory rates

George Mathew
Posted: Thu Oct 27 2011, 00:44 hrs Mumbai  

After waiting and watching for quite some time, the Reserve Bank of India (RBI) has finally decided to get tough against the discriminatory pricing of loans and the huge prepayment penalty — up to 2 per cent of the outstanding loans — being charged by some banks. 


The RBI has decided to set up a Working Group to look into principles governing proper, transparent and non-discriminatory pricing of credit. This panel is expected to look into different rates for old and new loan customers. Banks and housing finance firms charge different rates for their old and new loan customers. While old customers usually get the stick of high rates, new customers are wooed with carrots like waivers of charges, lower rates and other incentives. The fleecing of customers in the form of penalty on foreclosure or prepayment of loans and different interest rates for old and new loans has been going on for quite some time. 

Prepayment penalty on home loans on way out, RBI indicates

Borrowers wanting to prepay home loans can look forward to some relief as RBI today indicated that it would scrap prepayment penalties charged by banks.

"It is proposed to implement the recommendations of the Damodaran Committee, on which a broad consensus has emerged, as also the action points which were identified by the IBA (Indian Banks' Association) and BCSBI (Banking Codes and Standards Board of India) in the last Banking Ombudsmen conference," RBI said in its mid-year credit policy review.

The Banking Ombudsmen at their conference in September recommended abolition of pre-payment charges on home loans taken under floating rates by customers.

Banks may also offer long-term fixed rate housing loans to customers, Ombudsmen had suggested. They also said lenders may address their asset liability mismatch (ALM) issues by taking recourse to interest rate swaps (IRS) market.

Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it, to borrowers and, thus, banks only substitute interest rate risk with potential credit risk, the Ombudsmen noted.
Damodaran Committee which was set up by the RBI suggest improvement in banking services had also suggested removal of pre-payment charges.

Some of the private sector lenders charge up to 2 per cent of outstanding loan on foreclosure.
Public sector banks by and large do not levy any prepayment charges when the amount is paid by borrowers from their own sources.

The National Housing Bank (NHB) has already directed all housing finance companies to desist from imposing a prepayment penalty on home loan borrowers.

Banks to decide on ending loan pre-payment penalty

By Falaknaaz Syed Oct 23 2011 , Mumbai 


Close on the heels of the National Housing Bank (NHB) waiving off prepayment penalty on old home loan borrowers and pressure mounting from the Reserve Bank of India (RBI) on banks to follow suit, the management committee of Indian Banks’ Association (IBA) will be meeting on October 25 to decide on the next course of action.

The RBI is already contemplating such a move and had said that it will wait for the comments from IBA on its proposal to do away with prepayment penalty on floating rate home loans. Recently, the Banking Ombudsmen Conference suggested that banks should not impose prepayment charges on loans with floating rate of interest.

Relief for home loan borrowers

The National Housing Bank has asked housing finance companies to refrain from levy of penalty on preclosure of floating rate loans.

For those millions of home loan borrowers who were sulking at their decision to go for floating rate of interest, and who found their own interest rates being regularly reset even as new borrowers were being assiduously besought with lower rates, the order from the National Housing Bank that regulates Housing Finance Companies (HFCs) on treating both sets of borrowers equally should have come as a surprise.

The National Housing Bank, in a major relief to home loan customers, also asked the HFCs to refrain from levy of penalty on preclosure of floating rate loans, even if this was made from borrowed money (generally a euphemism for fresh loans at lower interest rates from a rival lender).

While the decisions have been welcomed by the real estate industry and the borrowers, the HFCs aren't really pleased.

In an interview to Business Line, Mr Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance Ltd, Chennai, expressed the fear that ‘home loans would be operated as demand loans with frequent shifts of home loans'. He argued that ‘there is a certain degree of unfairness' in that, while there are restrictions on charging a foreclosure premium on the asset side for HFCs; these will continue to pay premiums on foreclosures on the liability side.

FORECLOSURES

Currently, the HFCs see foreclosures to the extent of 10 per cent of the portfolio in a year. Already, foreclosure of home loans from own savings is exempted from penalty. Therefore, he didn't see much additional impact beyond, say, 0.075 per cent of the portfolio. While he didn't see this as a major source of income, this penalty always served as a ‘deterrent against poaching of customers'. As regards interest rate equalisation between old and new customers, he said this wasn't a major problem and will get settled with time. The real issue was there was no similar condition on lenders to HFCs!

On being asked if he feared there would be a shift from HFCs to banks because of this order since the National Housing Bank order would apply only to HFCs, Mr Acharya didn't view this ‘as a threat'. HFCs primarily thrive on their quick ‘turn-around time' and better understanding of the business and customer service. Some movement may be there, but that would only be an immediate reaction in the short term, he felt.

As to HFCs raising the interest rates for new borrowers so as to mitigate the impact of the order, he said the ‘interest rates would be guided more by ‘demand-supply' factor and the impact wouldn't be serious for HFCs who have borrowed on variable rate terms.

He felt that while there may be some rush for refinancing of higher cost home loans with cheaper loans, this would settle down. More than the bigger players in the industry, the smaller players are niche players and therefore won't be affected. As a result, his own company may not be impacted by more than Rs 3-4 crore this year. This wasn't a major component of its overall income and he said that ‘a HFC should thrive on continuity of a good customer rather than short-term gain from foreclosure premiums!'

Mr Acharya argued that this was ‘more a populist kind of measure', as home loans attract a lot of attention and touch the retail end of customers. Even the Competition Commission of India (CCI) had upheld the appropriateness of foreclosure premium. While conceding that there might be some fringe players charging premiums at exorbitant rates, that really may not be the case in his own company. Moreover such players charging premium at exorbitant rates could be controlled.

PREMIUM

He felt that there could ‘be a mandated rate of premium' rather than removing it altogether. Removal of foreclosure premium, if at all, should have been done across the financial sector, both for lending and borrowing, and not just for HFCs alone.

Mr. Acharya also felt it would be far more prudent ‘to chase a known customer with proven repayment record rather than go after a new home loan customer with all the uncertainties!', he added.

In an impact analysis of National Housing Bank's decision, IDFC Securities said that the regulatory arbitrage between banks & HFCs wasn't ‘likely to sustain'. At present, these norms apply only to HFCs, and not banks. RBI had earlier suggested, but not mandated, these terms for banks. However, it expected RBI also to follow suit.

Referring to the practice of financiers offering a lower rate for new home loans (for old borrowers) to attract business, it felt that the financiers would have to increase the interest rates for new loans more (by 100-150 bp). However, they could establish a credit profile of customers to mitigate the impact, offering some flexibility in pricing.

IDFC Securities expected new home loan rates to rise from the current levels and settle somewhere between the prevailing new and old home loan rates. With the cost of a new home loan rising, the growth in new home sales and mortgage portfolios would suffer.

Waiver of prepayment charges constitutes a very small part of financiers' income. But waiver increased borrowers' ability to refinance their existing loans. This could place players with a stronger liability franchise in an advantageous position vis-à-vis less competitive players, it concluded.

Mr. S. S. Asokan, Executive Director, Shriram Properties Ltd, Bangalore, said that at a time of rising interest rates, this will greatly help the borrowers and facilitate greater housing loan disbursals by the HFCs.

Amendments to SARFAESI Act to clear recovery processes: BA Prabhakar, Bank of India

In an interview with ET Now, BA Prabhakar, ED, Bank of India, gives his views on the amendments made in the SARFAESI Act. Excerpts:

What is your first take of the amendments and how they speed up the process of actually recovering bad debts and bringing down NPAs?

The details of the proposed amendments are not very clear but what we read from the press is that it is more about the procedural issues that are involved in the invoking of the SARFAESI Act. We understand that it enables the government to create an electronic registry for all the mortgages created. It is also going to simplify the approval process that banks have to obtain from the District Magistrate or the Metropolitan Magistrate before they really go ahead with the action. But we do not have the full details about this proposed amendment.

If you could highlight with an example, about how this act which came into place in 2002, will really help banks in bringing down their NPA levels and speeding up the process of recovery for bad debts?

It has definitely helped the banks improve the recovery performance. We need to differentiate the NPA recovery in 2 ways. One is: If the NPA has to be recovered through sale of securities, then definitely this act has been helpful to the banks. But if we are looking to NPA recovery, then we have to wait for the whole environment to improve and the economy to perform better. Then only much of the NPAs can be recovered.

Most of the NPAs fall in the category which are subject to the stresses in the economy and what you can recover from sale of security is not a very significant portion. What we are finding is in many of the recovery actions taken by us, we find that the borrowers immediately go to the courts, put stay orders, even though banks are allowed as per the act to sell the securities. So the whole process of vacating the stay will take time. So these are some of the bottlenecks which are being streamlined now. 

Would this in anyway facilitate faster recovery and favourable decisions from the debt recovery tribunal if I can use that term loosely because we see that forms are significant portion of NPAs for the PSU banks as well because we were given to understand that this would help faster auctioning of properties to recover the debts which was not possible in the past, is something like that going to happen?

Yes, it will definitely improve the faster recovery. There is no doubt about it.

This would be by virtue of special courts being set up or more powers being granted in the favours of the lenders which is the banks at the current point of time?

It will be removing some of the procedural bottlenecks which are there in the present provisions.

Currently what percentage of your NPAs are problematic or mortgaged against assets which you think will be helped if you could give us an amount since you gave us the 2 types of NPAs to monitor for recovery, what percentage do you think would get help under this act?

Maybe about 20% to 25% of the NPAs could fall under the securitisation act recovery actions that can happen, about 20% to 25% is what could be there.

What ails asset reconstruction firms?

Banker’s Trust | Tamal Bandyopadhyay

 

Asset reconstruction firms in India, through a trust, buy stressed assets of banks and financial institutions at a discount, recover them, and earn a fee for managing the trust

Banks make U-turn on prepayment

Resistance prompted by fears of liquidity mismatch; banks now want charges capped, not waived
Joel Rebello & Dinesh Unnikrishnan


Banks are lobbying hard against a move that was supposed to improve ties with customers—the abolition of penalties on the early repayment of floating rate home loans. Weeks after agreeing to waive the prepayment charges, banks now say they should be capped, but not waived.

The Indian Banks’ Association (IBA) lobby group has written to the Reserve Bank of India (RBI) arguing against the move, fearing mismatches in liquidity owing to early payment.

The IBA note, sent to RBI in the second week of September, was in response to recommendations made by a central bank-appointed committee on customer service in banks. Based on this, banks had adopted a charter of 10 action points early September to improve customer service, at the annual conference of banking ombudsmen in Mumbai.

The action point in question said: “Banks must not recover prepayment charges in floating rate loans.”

Part prepayment = cheaper loan, less tenor

Bindisha Sarang - livemint.com

If you are worried about your increased loan cost, owing to continuous rate hikes, and you are expecting a bonus this Diwali or a lump sum from some other source, here is one way to put it to good use: prepay your home loan partly. Even those of you who are not expecting a lump sum can use the part prepayment tool by paying small amounts at regular intervals.

We crunched numbers and found out that prepaying even small parts of your home loan would help you save money in the long run.
Part prepayment is done over and above your equated monthly instalments (EMIs). Says Satkam Divya, business head, Rupeetalk.com, a NetAmbit venture, “Whenever you make a part payment towards your loan, the payment goes towards repaying the principal amount of the loan. And when the principal amount goes down, the amount you pay as interest also goes down. Part payment has nothing to do with the current interest of the loan. Irrespective of high or low interest rates, if you have the money, you should go ahead and prepay or part pay the loan.”

Numbers tell the story
Part payment works for you whether you make a lump sum or regular payment. The bigger the amount you part pay, the lesser the total cost of the loan. Here are examples to explain how it works.

Pre-payment penalty: RBI proposes, will banks size up?

FP Editors Sep 7, 2011

Pre-payment penalty: RBI proposes, will banks size up?

FP Editors Sep 7, 2011




In a move that is likely to cheer borrowers immensely, banks have been asked to do away with the pre-payment penalty clause on floating-rate loans. However, it still remains to be seen how banks choose to implement the proposal of the Reserve Bank of India (RBI).

The recommendation is one from the 10-point action plan suggested by the RBI to improve customer service in the banking industry, all of which were outlined in a press release issued after the Banking Ombudsman conference on Tuesday. Among the key recommendations was that banks must stop enforcing pre-penalty clauses on customers seeking an early end to their indebtednesss. “Banks must not recover pre-payment charges on floating rate loans. Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage these. Banks only substitute interest rate risks with potential credit risks,” the release said.

Now, pre-pay your home and car loans without penalty

7 Sep, 2011, 06.32AM IST, ET Bureau 

MUMBAI: Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness.

"Banks must not recover pre-payment charges in floating rate loans," the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference.

"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk."

Banking leader State Bank of India dropped ‘prepayment charges' on all its loans over the past fortnight.

Mon, 02 May 2011 00:35:12 -0600 

The much-talked-about prepayment penalty on home loans is on its way out.

Banking leader State Bank of India dropped ‘prepayment charges' on all its loans over the past fortnight. The announcement conincided with the hiking of the bank's base rate and withdrawal of the controversyal teaser home loan schemes.

Bankers unhappy with waiver of preclose penalty on home loans

The finance ministry of India has directed banks to waive of preclosure penalty charges on home loans. The directive has however not made bankers happy and they are reluctant over its implementation.