Banks have to make less provision and continue to earn interest on loan which ultimately helps in inflating profit.Bank officials need not waste their time in initiating recovery measures to recover the money form bad borrowers.Banks will be able to achieve credit target easily and thus attract appreciation from all corners.Bank top officials will get appreciation from Ministry of Finance and Government of India . More and more dividend will be available to investors as well as Government of India who holds majority shares.
Borrowers will not be forced to repay the installments in time .They will repay the loan as per their whims and fancies. They will not be under tension of banks seizing their house in case of their default.In case of continued default bank will offer discount on repayment and ultimately come closer for amicable compromise settlement. Even when bank officials agree for waiver of loan or compromise settlement after sacrificing a significant portion of outstanding loan, bank officials are not going to lose money or loss their salary or suffer any loss in career.
Government will also be happy and comfortable if banks continue to conceal bad assets and book higher and higher profit and give higher and higher dividend.
Investors will also get large amount of dividend on their investment in shares of banks.
Common men and general public who deposit their hard earned money in these banks are not united and hence they may do nothing to either bank management or the government or the officials of bank who cheated them and who caused huge loss to their savings.Common men will cry for a few days and then bear with loss in the name of God wishes. They usually suffer when chit companies or NBFC cheat them and they fly away .
As such it is in the interest of all other than common men if bank treat all bad or good assets as Standard and minimum of assets is declared as NPA. Management of public sector banks as such try to restructure and rephase all bad accounts so that the account remain in standard category.
Perhaps this is why banks in general thought it wise to conceal NPA for last ten years and more and booked as much profit as they liked by manipulating all books of accounts in their favour in collusion with team of Chartered Accountants, politicians, ministers, senior bureaucrats of RBI and GOI.
Had CBS not been invented , all banks and all bank officials would have been declared as Heroes of the country.I think clever Chidambram has a vision in his economist mind to force bans to move in this direction.After all he also has aspiration in his core of heart to be considered as Successful Finance Minister rightly or wrongly as Chairmen and Managing Directors of banks and other officials are interested to be popular.
Clever Finance Minister as his predecessors , can change rules of Income recognition and prudential norms set by RBI of asset classification in banks to facilitate bankers to conceal NPA, he can dilute provision norms, he can promote restructuring in legal way to replace fraudulent restructuring undertaken by bank officials to conceal NPA, he can promote General Manager to the post of ED and CMD who is expert in committing fraud and concealment of fraud, he can allow banks to recruit and promote bank staff after taking some gifts in lieu of the same as the prevalent culture in other government department and in political arena and so on.
The Secret the Banks Don`t Want You to Know! (Link to this page---------http://thesop.org/story/20130708/the-secret-the-banks-dont-want-you-to-know.html)
Perhaps you will be shocked to find out the banks` worst kept secret, or perhaps it is something that you already knew, but never recognized as a valuable piece of information.Lending institutions protect themselves by securing the loan with the property that they are financing. This gives the moneylender some assurance that the property owner will pay back the borrowed money on time as specified in the original mortgage agreement and as long as you keep making your mortgage payments, everybody lives happily ever after.
However, if the homeowner begins to fall behind on mortgage payments, the dream of owning a home could become your worst nightmare, not only for you but also for the lending institution.
What is the secret that the bank does not want you to know? The bank does not want to take away your home! I know it sounds absurd, but by the time you finish reading this article you will be persuaded that it is an accurate statement. Allow me to go a step further; the very last thing that the bank wants to do is foreclose on your property. It will become an extra expense that they don`t need to incur and it will cost them thousands of dollars to take a property through the foreclosure process. Now you may be asking yourself: If that`s true, why are they threatening me with foreclosing my property? What do they really want?
There is a simple answer; the bank collection agent wants to scare you into making up the late mortgage payments, and by doing so, ensure you will continue to make your payments on a regular basis until the end of the term as specified in the mortgage agreement. The threat of foreclosure is the only tool that the bank has at its disposal to persuade you to make the mortgage payments.
Furthermore, once the bank initiates the foreclosure process, the laws regulating the banking industry require them to report that property as a non-performing asset. Doing this will hinder the bank`s capacity to borrow more money and will affect its overall credit rating. The bank must try to avoid having to report a non-performing asset on its books at all cost. In many cases, banks intentionally delay initiating a foreclosure proceeding for up to six months, and sometimes even up to a full year, to avoid reporting the property as a non-performing asset.
The `non-performing asset` problem or the NPA, as it is commonly known in the banking and financial industry, affects the banks in more ways than you and I may care to know. These three simple letters strike terror in the banking sector and business circles. The dreaded NPA rule simply states that: When interest on a loan or any other monies is due to a bank and it remains unpaid for more than 90 days, the entire bank loan automatically becomes `a non-performing asset`. They will go to great lengths to avoid having to report a property as a non-performing asset.
Why would three simple letters, NPA, cause such terror to a financial institution?
There are a number of problems that will arise from having too many NPAs on the bank`s books. The biggest problem is that the bank must have a certain amount of dollars in cash reserves. If their levels of non-performing assets become too high, they will have to put more cash into their reserve account to compensate for these non-performing assets. This means they now have less money to lend. In addition, they now have to deal with a house that they don`t want because it will become a money pit. Furthermore, they will not be able to make a profit on it because of the way mortgages are structured.
In their quest to maximize their profits, banks structure mortgages in a way that they are paid the majority of the interest up front or at the beginning of the loan term. This is called a frontloaded mortgage, and most mortgages are structured in the same way. This means that in the early years of your mortgage you have not built much equity in the house because the majority of your mortgage payment was slotted to pay for the interest on the loan.
Often banks find that their asset (your house) is worth less than what they lent out, and once the bank takes ownership of your property, they not only have an administrative and legal nightmare, but they are about to take a financial bath!
Even though I am not a bank advocate, I am certain that if you were in the bank`s situation, you would be forced to do the exact same thing. The bank does not have any other recourse. The only legal recourse available to them is foreclosure in order to try to minimize some of their losses. However, that is their very last option.
Can you see the predicament that lending institutions find themselves in? On the one hand, they are losing money by not receiving your mortgage payment and on the other hand, they can`t really afford to foreclose on you because of the negative consequences this will bring them.
While this is an admittedly simplified explanation of how financial institutions operate, the bottom line is that banks are in the `money buying and selling business`. To put it in clear and simple terms, the bank`s profit is generated by the spread created between the interest rate that they pay you on your money and the interest rates that they charge on the money that they lend out. The bank pockets the difference. For the bank to make any money, it must lend out the funds in its possession, or find some sort of investment vehicle that will guarantee a rate of return greater than its cost of borrowing.
Consider the main motivating factor for a bank to be in business. It is not to provide a service to the general public; they are in business to make money. In a foreclosure case, they will most likely lose money. As the old saying goes, the best way to make money is to stop losing money. Having the knowledge of how lending institutions operate is empowering. Since you now know that lenders don`t want to foreclose on your property " and you don`t want them to foreclose on you " you have common ground to work out an agreement that will stop the foreclosure process and satisfy both of your needs. Remember: The bank does not want to foreclose your property.
Joaquin Benitez is writer of above artilcle
Bank loan recasts top Rs. 2.5 trillion
In the quarter ended 30 June, banks restructured debt of Rs.20,000 crore against Rs.15,000 crore in the previous quarter
Indian banks have cumulatively restructured more than Rs.2.5 trillion of loans under a popular mechanism created by the central bank in 2005, with a significant portion of this being done in recent quarters and years—an indication of rash bets taken by borrowers and accommodating lending rules followed by lenders in the earlier easy money regime and the impact of the economic slowdown.
According to two officials of the corporate debt restructuring (CDR) cell who did not want to be identified, the Rs.2.5 trillion milestone was crossed in June.
India’s slowing economy, which grew at a 10-year-low of 5% in the fiscal year ended March, continues to affect the ability of companies to repay money borrowed from banks, forcing many lenders to restructure the loans in an effort to prevent them from turning bad. Banks have to set aside (or provision) more money for bad loans (or non-performing assets) than restructured ones.
Experts say that companies have also been hit by delays in government approvals for projects.
The CDR cell is a forum of banks that seeks to assist companies that can’t repay their loans by extending the payback period, reducing the interest rate, providing a repayment holiday (or moratorium), converting part of the loan into equity and even writing down the loan amount.
Debt can be restructured under the CDR facility only if 60% of the banks that have loaned money and banks that have loaned at least 75% of the total amount agree to the restructuring (both conditions have to be met).
In the three months ended 30 June, banks restructured the debt of 12 companies, totalling Rs.20,000 crore. This included the restructuring of Rs.13,500 crore of debt of engineering and construction firm Gammon India Ltd and Rs.3,000 crore of debt of logistics company Arshiya International Ltd.
In Gammon’s case, the banks agreed to stretch the loan repayment period to 10 years and to a moratorium of two years. They also agreed to a 1-2 percentage point reduction in the interest rate to 11-12%.
In the three months ended 31 March, banks restructured around Rs.15,000 crore of debt. The pace of restructuring has clearly increased even as companies are now required to make provisions for such loans. Under new RBI rules, banks need to set aside 5% of the fresh restructured loans as provisions. If loans turn bad, the provisioning goes up to at least 15%. Higher provisioning affects the profitability of banks.
In 2012-13, banks restructured Rs.75,000 crore of loans under the CDR mechanism, nearly double what they did in 2011-12. Analysts estimate that between a fifth and a fourth of such restructured loans turn bad.
“There is definitely a concern,” said Arun Kaul, chairman and managing director of Kolkata-based state-run lender UCO Bank. “That is the reason why the Reserve Bank of India has increased the provisioning for restructured loans, but it is incorrect to believe that all of the restructured loans are going to turn bad.”
Like many of his colleagues in the industry, Kaul too is optimistic about an improvement once the economy starts growing faster.
Economists aren’t as bullish.
“Even if the economy recovers in a significant manner and investor confidence returns, the lag effects of the slowdown and high interest cost in the economy will continue to impact Indian firms for the next one-two years,” said Madan Sabnavis, chief economist at rating agency CARE Ltd.
Still, the economy has bottomed out and “things can only get better from here”, Sabnavis said. India’s economy expanded 4.8% in the January-March quarter.
This year, the government estimates that the economy will expand by 6.1-6.7%. According to the finance ministry, around 215 infrastructure projects, involving a collective investment of at least Rs.7 trillion, have been stalled. A revival of these projects will improve the financial position of the companies behind them.
Bigger problem
Experts say that they believe data on loans restructured under the CDR facility do not reflect reality because banks also do so-called bilateral restructuring. Bankers say no numbers are readily available for the loans thus restructured, but admit that, in general, for every rupee restructured under CDR, another is recast bilaterally. Some put the total value of restructured debt in the banking system at around Rs.4 trillion, or 6-7% of the total loans issued by Indian banks.
“General indicators tell us that (such) restructuring will continue for at least one-two years, which would put pressure on the balance sheets of banks. Public sector banks will continue to bear the burden,” said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd.
A more accurate indicator of how things will pan out in the approaching quarters will emerge only after banks announce their June quarter numbers, Agarwal said.
Total gross non-performing assets of 40 listed Indian banks grew to Rs.1.8 trillion at the end of the March quarter, 36% up from Rs.1.32 trillion in the year ago.
Large-scale restructuring of loans given to firms began in the aftermath of the 2008 global financial crisis. A liquidity crunch that followed the crisis and the slowdown in global markets affected companies in India too, forcing banks to recast loans across sectors such as textiles, real estate, power, and gems and jewellery. About 10-15% of the loans restructured then are believed to have turned bad.
This time the proportion could be higher, said analysts, because RBI has been slow to exit from its tight monetary stance. In 2008-09, the central bank sharply reduced policy rates to breathe life back into the economy. This time, persistent inflation has stayed its hand.
Sir, please provide some details about (Non Performing Assets) NPA & how it affect Banks - concept, issues & challenges
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