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Asset Quality Challenges in India Diagnosis and Prognosis (Shri S. S. Mundra Deputy Governor - April 28 2016 - at the Edelweiss Credit Conclave Mumbai)

News and Press Release - Dated:- 30-4-2016 - Shri Rashesh Shah, Chairman and CEO - Edelweiss Group; members of the finance fraternity; delegates to the Conclave; ladies and gentlemen! It is indeed a pleasure to be here this morning. In my address, I primarily intend to focus on some of the contemporary issues around our banking sector that have come to dominate news rooms, court rooms, board rooms and drawing rooms alike. I am hinting at loud vilification of bankers and promoters without disting .....

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oon, easing of CPI inflation and rising private consumption. Focus on rural and social infrastructure sector and decline in subsidy outgo have resulted in improvements in the fiscal front, both quantitatively and qualitatively. Over the recent past, steel prices have strengthened both, globally and domestically, especially after introduction of the Minimum Import Price. Cement and auto sectors have also shown signs of growth pick up while the demand for oil has also increased by about 11 % in te .....

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ssets (GNPA+ Restd. Std. assets +Written Off Accounts) for the banking system as a whole, which stood at 9.8% as at the end of March 2012, moved up sharply to 14.5% as at the end of December 2015. During the same period, the stressed assets for the PSBs spiked from 11.0 % to 17.7%. 5. Similarly, the growth in net profits of SCBs was also on a declining trend since 2011-12 and turned negative in 2013-14. This decline in net profits of SCBs during this period was primarily the result of higher pro .....

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ks 1.63 1.65 1.68 16.46 16.22 15.74 3 Foreign banks 1.92 1.54 1.87 11.53 9.03 10.25 All SCBs 1.04 0.81 0.81 13.84 10.69 10.42 Notes: Return on Assets = Net profit/Average total assets. Return on Equity = Net profit/Average total equity. Source: Annual accounts of respective banks. Diagnostic or Root Cause Analysis 6. As in any medical exercise, the next step is to run a diagnostic check to understand the root cause of the problems. The asset quality problems can be fundamentally ascribed to one .....

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ed in the country. Several large scale projects in the country have remained stalled due to lack of environmental clearances, cancellation of coal block allocation, falling through of the fuel supply arrangements, local protests etc. Now, where do you bracket these promoters or the lending banks? Do you brand such promoters as wilful defaulters or such lenders as ill-motivated? b) Corporate Imprudence The imprudence of the corporates can be attributed as the second most important factor for poor .....

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anors Not all promoters/borrowers have had a clear conscience and some of them were out to dupe the system by using foul means. They are willful defaulters in banks books as they have been unwilling to honour their payment obligations even while having a capacity to do so. Some of the promoters have diverted borrowed funds for purposes other than for which the finance was availed. There are also occasions where some of the borrowers have siphoned off funds for personal gains and not created any .....

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lso not exercised due caution while conducting due diligence on the projects that they have financed. Some of the common shortcomings that the banks exhibited include: Governance deficit Poor credit appraisal particularly in infra financing such as highways where contracts were gold plated ; Power which suffered from Faulty FSAs, absence of Pass through arrangements, lack of provision for termination payments etc.; Weak risk management; Chasing quick growth; Pretend and Extend 7. The mistakes co .....

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uilt on the premise that NPAs are taboo and no one would be willing to lend to such accounts. Though, this perception has some real life truth, my question is should we not administer drug to the sick? Sometimes, there are overblown fears of unknown. If we don t address the stressed accounts, what are our alternatives? Company position would deteriorate further, hit banks books and would still invite further scrutinies. Having said that, it is important to quickly decipher whether the disease is .....

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for Lenders: Framework for Revitalising Distressed Assets in the Economy by RBI, which were aimed at improving the system s ability to deal with corporate and financial institution distress. Detailed Guidelines on formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), Refinancing of Project Loans , Sale of NPAs by Banks and other regulatory measures were also issued to banks for enabling prompt steps for early identification of problem cases, timely restructuring of accounts cons .....

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ed for extending total support by infusing capital /committing to infuse capital in the weaker PSBs. 10. Whether this surgery is successful? Did it have the desired impact? I would think so. In my interaction with various players, I sense it has a very positive impact, even in Tier II and Tier III towns. The promoters have realized that the banks are going to come hard after them if they don t observe credit discipline. Of course, there are skeptics who say whether it was the right time to RBI t .....

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edy for the same, including weird alternate therapies. Situation here is not much different. Even as RBI has launched steps to cleanse the banking system of its ill-health, everyone seems to have become wiser about the issue and have a prescription to offer. Some blame the patient, some blame the doctor and still others are blaming the procedure. So called expert opinions are being voiced about the credit appraisal process of banks, collateral availability, personal guarantee, restructuring, sta .....

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ithin their risk appetite. Going forward, they have to refrain from binging on what their neighbors are eating. More simply put, the Board and the Top Management have to steer the bank in a manner that they have a robust credit appraisal process, effective post-disbursement supervision system, a diversified portfolio and better risk governance. The lifestyle changes for the borrowers on the other hand would entail adoption of a regimen more attuned to a marathon runner than a sprinter. Running e .....

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ir commitments to accounts which are in stress, for a variety of reasons. It may be extremely difficult to operate the enterprise profitably without paring down debt levels and hence, a first step could possibly be to bring down the debt to a manageable level. This might involve writing down a part of the debt by the lenders and/or converting them into equity and bring in a new promoter to run the enterprise. This might, however, be a time consuming process and hence, in the interim the banks ma .....

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