FIM

Market Shares

Credit Growth

• Private banks have managed to grow their credit at much higher rate than their PSU peers.
• The credit growth for PSU banks suddenly dropped from 22% CAGR (1994-2014) to 2% CAGR (2014-2018). Whereas, the private banks continued to grow at 18-20% rate.
• Major Reason: Heavy Corporate lending by PSU Banks

Return on Assets (RoA)

• Private Banks Enjoy Higher Return on Assets.
• ROAs have turned negative for PSU banks in last couple of years due to higher provisions because of their higher NPAs.
• Other Reasons: Credit Cards, Retail Lending Etc.

Deposits

• The aggressive expansion of branch networks by the private banks has benefitted them by increasing their share in the pie of deposits.

Non Performing Assets and Frauds

• The non-performing asset (NPA) pile up happened because of a credit boom between 2006 and 2011 when bank lending grew at an average rate of over 20 per cent.
• NPA's in the country crossed 10 Lakhs lately, out of which more than 70% are from the corporate sector. On the other hand, farmers have been recorded to default on 8% of the total NPAs.
• Primary sector has defaulted on 6% of the total amount borrowed.
• Only 12 companies from the corporate sector constitute more than 25% NPAs in the country which is mainly due to intentional mismanagement of funds.

Rural Markets

• 69% of India’s population resides in rural areas.
• Government initiatives to give access to bank accounts to all the households of the country.
• Pradhan Mantri Jan Dhan Yojana, August 2014
• Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) stood at Rs 1.06 lakh crore (US$ 15.17 billion) with 37.34 crore accounts registered.
• Despite this, inadequate infrastructure to reach out to the market at the bottom of the pyramid (BOP).

Lending to Micro, Small & Medium Enterprises (MSME's)

• Need for credit increasing.
• Credit allocation has not been upto the mark.
• Pradhan Mantri Mudra Yojana, April 2015
• In May 2018, the Government of India provided Rs 6 lakh crore (US$ 93.1 billion) loans to 120 million beneficiaries under Mudra scheme.
• Micro-Units Development and Refinance Agency (MUDRA) scheme not successful.
• Loans majorly for well performing sector with concrete business plans.
• Jobs created only in 20% of the cases (i.e. only one in five Mudra loans has led to job creation).

Capital Adequacy Ratio

• CAR is the ratio of a bank's capital to its risk.
• CAR has declined steadily for Indian banks, especially for public-sector banks.
• If banks do not shore up their capital soon, some could fail to meet the minimum capital requirement set by the RBI. In such a case, they could face severe issues.
• As per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.

How it happened

• The LoU is issued by PNB to the foreign bank through SWIFT messages.

• Normally the bank issuing the LoU asks for a cash margin. In this case, there was no scheduled credit limit and no margin was demanded.

• The entries in respect of LoUs issued were not recorded in PNB’s core banking system (CBS)

• Colluding officials sent SWIFT messages from one of PNB’s Mumbai branches to overseas banks offering unauthorized LoUs.

• Under the RBI guidelines, buyer’s credit for import of gems should not exceed 90 days from the shipment date; in this case, however, they were rolled over repeatedly.

• Not knowing Nirav Modi or his credit history, the overseas bank extended credit bases entirely on PNB’s LoU. In case of default, PNB would have to make good this amount to the overseas bank.

• Overseas bank remits funds to Nostro account of PNB, backed by the LoU.

• In the normal course, on the due date, PNB should have remitted the funds to the overseas banks and recovered the amount from Nirav Modi.

• But in the Nirav-PNB case, LoUs kept getting rolled over.

• The scam went on for shocking seven years; 151 LoUs were issued in 2017 alone

Measure

• In March 2018, the government approved the Fugitive Economic Offenders Bill, to deter economic offenders from evading the process of Indian law by giving powers to the government to confiscate assets of a fugitive, including Benami assets of absconding loan defaulters.

• The Reserve Bank of India scrapped banking instruments such as the Letter of understanding (LoU) and Letter of Comfort (LoC) .

Why it happened

• PMC’s results in FY19 show no issues with the bank, with net NPAs of 2.19% and capital adequacy ratio (CAR) of 12.62% — above the RBI’s 9% threshold.

• It was among the top five co-operative lenders in India, with a loan book of Rs 8,383 crore.

• This excluded the bank’s Rs 6,500-crore hidden loans to HDIL as of March 2019, which was facing insolvency proceedings in the NCLT. In other words, PMC’s official exposure to HDIL constituted more than 75% of the bank’s total loans. The bank management replaced 44 loan accounts with 21,049 dummy accounts

Measures taken by the RBI

• Introducing the Banking Regulation (Amendment) Bill- The proposed law seeked to enforce banking regulation guidelines of the RBI in cooperative banks while administrative issues will still be guided by the Registrar of Cooperative.

• Revised exposure norms- The Large Exposure Framework (LEF), effective from 1 April 2019, seeks to reduce concentration risk in the banking industry, already saddled with bad loans. It aims to align with the standards on a supervisory framework for measuring and controlling large exposures issued by the Basel Committee on Banking Supervision.

• Heightened supervision-The central bank said that it intended to build a framework like CRILC for UCBs with assets of Rs 500 crore or more.

• Strengthen cyber-security

Why it happened

Bad Loans

It went on a loaning spree with advances rising by 334% between Financial Year 2014 and 2019

Customers withdrew large amounts, resulting in the credit-deposit ratio crossing 100% in 2018-19. That is, it lent more than it received.

Governance issues

The bank has experienced serious governance issues and practices in recent years that led to its downfall. The bank under-reported Non-Performing Assets to the tune of Rs 3,277 crore in 2018-19.

Measures taken by the RBI

• Implementation of Section 45 of the Banking Regulation Act .

• The RBI said that the State Bank of India (SBI) will own 49 per cent of Yes Bank’s shareholding for its revival.

• Apart from fixing the share price to Rs 10, the RBI also said that all those who invested in the bank’s 81 additional tier 1 capital bonds — which pay back a higher rate of interest — will have no value.

What is the IBC & Why was it needed?

• Passed on 11th May 2016
• It was done to consolidate all the existing laws related to insolvency in India and to simplify the process of insolvency resolution.
• Insolvency is the inability of the individuals or corporates to repay their debts. Bankruptcy is nothing but a legal declaration of insolvency.

Reasons-

• No single law
• Overlapping of jurisdiction
• Complex structure incurring high cost
• Need to reduce resolution time ( estimated 4.3 years for 1 company)

STRUCTURE & PROCESS

• Adjudicating authority
• National Company Law Tribunal (NCLT) for companies and LLPs
• Debt Recovery Tribunal (DRT) for individuals and partnership firms.
• The insolvency resolution process can be initiated by any of the stakeholders of the firm

BENEFITS

• Allows an easy exit for businesses and leads to optimum allocation of capital in the free market
• Improve India’s ranking in the World Bank’s ‘Ease of Doing Business’ index
• Promote investment and entrepreneurship in the economy
• Resolve India’s bad debts problems
• Timely resolution of companies
• Banks can clean up their books
• Helps all the stakeholders involved in an insolvent company

BANKING REGULATION ACT, 1949

• Regulates all banking firms in India
• Supervision of commercial banks
• Reserve Bank of India (RBI) has power to-
• license banks
• regulate shareholding
• operations of banks
• banking policy
• impose penalties

REASONS FOR AMENDMENT

• INR 9.64 trillion stressed assets
• Identified more than 50 large loan defaulters (2016)
• High risk of bankruptcy - Credit Suisse estimates, about 40% of debt lies with companies with an interest coverage ratio of less than 1

IMPACT

The Banking Regulations (Amendment) Ordinance, 2017 enables the RBI-

• To initiate insolvency proceedings according to the IBC, 2016
• To issue directions on stressed assets
• Appoint committees to advise banks

Impact-

• Structured mechanism and timelines for exercising IBC, 2016
• Gross NPAs as a share of gross advances was 11.2 per cent as on December 31, 2018 and 9.1 per cent as on December 31, 2019.
• The net NPA has come down to 3.7 per cent from 6 per cent during 2018-19

OBJECTIVES

The main aim of the amendment of the Sarfaesi and DRT Act are-

• Faster recovery and resolution of bad debts
• Easy functioning of asset reconstruction companies (ARCs)
• Support the IBC, 2016
• Create an enabling infrastructure to effectively deal with NPAs

KEY FEATURES OF THE AMENDMENT

• The bill gives RBI powers to audit and inspect ARCs
• RBI can remove the chairman or any director and appoint central bank officials to its board
• Central bank can impose penalties for non-compliance with its directives
• Central Bank can regulate the fees charged by these companies to banks at the time of acquiring such assets
• Enable non-institutional investors to mandate a timeline for possession of secured assets.
• Increase in penalty amount from Rs. 5 lakh to Rs. 1 crore
• Centralized database of all loans against properties given by all lenders.
• Electronic filing of recovery applications, documents and written statements.
• The debtor will have to deposit 50% of the amount of debt due before filing an appeal at a DRT
• Time-bound process