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Saturday, August 23, 2014

`1 lakh cr of your money: What’ve banks done with it?


dna exposes one of the best-kept secrets in the Indian banking industry: Fraud cases on the rise


Mumbai: Bank funds of about Rs 1 lakh crore are caught up in frauds or under investigation by the Central Bureau of Investigation (CBI).

But banks are greening their books by selling off bad loans to asset reconstruction companies (ARCs) or by restructuring payments (where the tenure of loan is altered when there is a repayment issue) or plain writing it off to make their balance-sheets rosier.

As on June 30, about Rs 2.54 lakh crore of bank loans turned into bad loans after borrowers defaulted on repayments. Add another Rs 4.46 lakh crore of restructured assets and you have around Rs 7 lakh crore out of the Rs 61.98 lakh crore of bank loans (read depositors' money) that are under stress.

Frauds and vigilance investigations have become commonplace. Depositors' money is getting wasted on operationalising promoters' business plans that are being drawn up to swindle money from banks. Most frauds are staged by dubious businessmen, who are hand-in-glove with corrupt bankers.

Which are the notable frauds reported?

Banks are closely monitoring the Bhushan Steel case (Rs 40,000 crore) while the account has still not turned bad. Kingfisher (Rs 4,022 crore), Deccan Chronicle (Rs 4,000 crore), Zoom Developers (Rs 2,400 crore). Winsome Diamonds (Rs 6,581 crore) and First Leasing Financial (Rs 1,000 crore) are some of the other big cases.

Aren't banks punished?

The RBI recently carried out an independent scrutiny of the loan and current accounts of Deccan Chronicle Holdings and slapped a combined monetary penalty of Rs 1.5 crore on 12 banks for violation of various rules. They were five public sector and seven private banks. While the maximum penalty of Rs 40 lakh was imposed on ICICI Bank, others penalised include Andhra Bank, Axis Bank, Canara Bank, Corporation Bank, HDFC Bank, IDBI Bank, IndusInd Bank, Kotak Mahindra, Ratnakar Bank, State Bank of Hyderabad and Yes Bank.

How do banks report drop in bad loans?

Despite an increase in frauds, many big banks like SBI and ICICI Bank have reported lower bad loans in the first quarter of 2014-15. Banks have sold bad loans of close to Rs 30,000 crore to ARCs till the end of the first quarter ended June 30, 2014. Banks have started selling off loans that are just 60 days due for repayment to avoid an NPA tag on their balance-sheets.

What do ARCs do?

Asset reconstruction companies (ARCs) specialise in recovery of loans or reviving the fortunes of stressed companies. Banks like SBI, ICICI Bank and IDBI Bank together have set up an ARC --ARCIL. There are private ARCs owned by Edelweiss and JM Financial.

How do banks

sell bad loans?

Banks often sell the loans at a discount of 20-40%. ARCs pay 15% of the bad loans in cash and the remaining as security receipts, to be encashed over 8 years. All public sector banks sell loans through an auction process. Private sector banks sell them through bilateral deals.

What is RBI doing

about it?

RBI said in its annual report released on Thursday. The increase in the level of restructured standard advances since 2012-13 reflects potential hidden stress in the quality of loan assets. The improvement in NPAs during Q4 of 2013-14 needs to be cautiously examined in the face of the increased of?oad of loans to ARCs by banks.

Is it planning any concrete action?

The RBI is proposing to cut down bank exposure to companies by half, so that funding to companies is drastically brought down. Tightening norms will help banks in risk mitigation during cyclical downturns.

Tuesday, August 19, 2014

Re's Sudden Fall may Push Cos to Hedge Currency




The sudden fall in the Indian rupee has woken up many corporates to the ground realities of the currency market. After six months of stability, complacency had set in. Indian corporates, after remaining unhedged, may now start covering their currency exposure.

Some companies tend to stay away from hedging as its cost eats into the net receivables.

"Sustained RBI purchases of dollars, uncertain geopolitics and the prospects of early withdrawal of the monetary accommodation in the US do appear as risks to the rupee," said Ananth Narayan, regional head of financial markets, South Asia, Standard Chartered Bank. "In such a context, Indian importers would be well advised to seek option protection as insurance against any shock moves in the local currency ."

Between May 22 and August 14, the Indian rupee dropped about 4% to close at 60.77 per US dollar on August 14 from 58.46 on May 22. It had risen 5.60% till May 22 since the beginning of the year. Strong Reserve Bank of India intervention in mopping up dollar inflows has prevented the rupee's significant appreciation, as any sharp rise in the local unit would hurt exporters.

According to the latest data, the central bank has bought a net $2.4 billion collective ly in May and June compared with $2.3 bil lion sold in the year-earlier period when the rupee was falling against the greenback. In the last few weeks, the dollar has been strengthening as investors seek the safety of the US currency on the back of tensions in Iraq, Ukraine and Gaza that could also hurt crude oil prices.

Moreover, improving economic fundamen tals in the US are attracting investors with their eye on a possible interest rate increase. This too has helped in arresting the rupee's rise.

"Despite all, the local unit has clearly out performed when compared with other cur rencies like in Brazil, Russia or Korea," said NS Venkatesh, executive director at IDBI Bank. "Both exporters and importers should hedge their currency exposures as and when they get the right opportunity at a reasonable price.Chances of rupee appreciation are higher than its depreciation."

The one-year forward rupee-dollar forward rate is currently quoting at about 8.20% or a premium of about ` . 4.90 over the spot market. In the current perspective, it looks attractive for exporters to take positions at these levels with the expectation of more overseas inflows in the coming days. However, it's still a bit expensive for importers, who may be considering their options, dealers said.

"Volatility is likely to increase in the domestic currency market," said Pramit Brahmbhatt, CEO, Veracity Financial Services. "While foreign inflows are likely to increase further in 2014-15, external factors may strengthen the dollar against other currencies."

According to Narayan, going forward, domestic factors look much more favourable than 12 months ago.

Foreign exchange reserves have improved significantly by about $4 billion to $319 billion on August 8 since May 16 this year. The prospects for a growth revival look good given the positive indicators and that the government is looking to boost the economy.

"Given improved India fundamentals and steep forward premia, exporters continue to see merit in increasing hedge ratios, despite lack of rupee appreciation," Narayan said.





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