Bad loans comprise 1.5 times the market value of all public sector banks and 6.6 per cent in the case of private sector banks. If those PSU bank loans that face the risk of being declared as non-performing assets (NPAs) are considered, the overall stressed advances are estimated to be at over Rs 8 trillion.
Private sector banks have a lesser problem because their gross NPAs amount to Rs 46,000 crore, which is about one-eighth of their total market value. The latest quarter results shows that the cumulative gross NPAs of 24 listed public sector banks, including market leader State Bank of India (SBI) and its associates, stood at Rs 3,93,035 crore as on December 31, 2015.
As banks try to clean up their loan books, consolidation of state-run lenders is at the top of the banking reforms agenda.
After the RBI cracked the whip, gross non-performing assets (NPAs) of many banks have climbed to nearly 10 per cent, forcing them to set aside large sums to cover bad loans. Most have either reported a sharp drop in third-quarter profits or posted losses. A clear balance sheet will allow fair valuations amid a growing consensus that this is the right time to get weaker banks absorbed by the stronger ones.
The last transaction in the public sector bank space was the takeover of State Bank of Indore by State Bank of India in 2010. Prior to that, SBI took over State Bank of Saurashtra in 2008. A similar exercise involving Bharatiya Mahila Bank and SBI has been on hold for some time.
The RBI left the key repo rate unchanged at 6.75 per cent, saying it would want to wait for more inflation data before taking action. It also left the cash reserve ratio and statutory liquidity ratio unchanged, despite concerns that liquidity is tight in the system.
In its monetary policy statement, the Reserve Bank said that the Indian economy was doing well, but said it would take into consideration steps taken in the Budget that would boost growth while keeping inflation in check. The central bank cut rates by a total of 125 basis points, starting last year. It added that it was on course to meet its January 2016 target of keeping consumer inflation below 6 per cent though it upped its January 2017 target from 4.8 per cent earlier to 5 per cent (subject to upward risks arising out of Pay Commission rollout).
In a move aimed at helping new private banks meet stringent capital norms, RBI may allow them to have overseas investments of up to 74 per cent at the inception stage. The 'on-tap' application window is likely to open for a period of one month in July 2016 with an empowered committee screening applications.
There is considerable anxiety among banks for having to account for the bonds of state-owned power utilities, or discoms. About Rs 1 lakh crore (or even more) of outstanding bank loans to these entities would be converted into bonds. Although this may look like a mere transfer of credit from a lender’s corporate book to its treasury book, the simple accounting entry can have a severe impact on banks’ books and profits.
If banks are forced to hold these state guaranteed securities in their trading portfolios, the discom papers would clog books of several banks and lower their appetite for central and state government bonds. Moreover, banks would have to absorb mark-to-market losses on these high-yield bonds.
Banks in the country may need as much as Rs 2.9 lakh crore in capital in the next three years. A successful privatisation of IDBI Bank could turn the fortunes and draw investors, reducing the cost of revitalising state-run banks.
According to market research, banks, mostly state-run, may need at least Rs 63,000 crore by the end of the next fiscal year in the so-called additional Tier-1 bonds, internationally known as contingent convertible bonds, which become equity when banks’ capital ratios deteriorate during times of crisis.
The RBI will buyback government securities worth of Rs 20,000 crore to ease the prevailing cash crunch in the market. But that may not be enough to lead to a significant change in rates in the short term that have climbed substantially in the past few months.
Bond traders and banks are irked with the Reserve Bank of India's stance on liquidity as they blame the system deficit for the RBI's interest rate cut not flowing through to borrowers.
The liquidity deficit is seen as a concern with the negative balance staying well in excess of the prescribed 1 per cent of total bank deposits. Banks will have to meet 75 per cent Liquidity Coverage Ratio as prescribed by Basel III international norms, by April 2016. This means, three-fourth of a bank’s deposit base should be invested in high-quality liquid securities, which in turn, would chock a lender’s liquidity position.
The government’s large cash balance with the Reserve Bank of India is possibly an effort to meet the fiscal deficit target and consequently liquidity concerns. About Rs 77,000 crore of government borrowing will be due in April 2016, for which the government is preparing itself so as not to disrupt the market at the start of the new financial year. According to estimates, repayments to the tune of Rs 68,000 crore are due in the first half of April and another Rs 9,000 crore in the second half of the month. At the beginning of February, the government had a cash balance of Rs 1.24 lakh crore with RBI. The finance ministry announced a repurchase of these securities for an aggregate amount of Rs 20,000 crore, utilising part of its cash balance with the RBI.
Usually, in the first month of the fiscal, revenues are low and government spending is largely met through borrowings. But taking out such a large amount at the start of the year could put stress on the system and cause an increase in yields.
The Reserve Bank of India said foreign exchange reserves rose by $1.590 billion to $349.152 billion in the week ended January 29. This was despite the rupee coming under pressure along with other currencies.
Experts said dollar inflows during the reporting week may have been higher than outflows, leading to the increase. RBI doesn't give reasons for the rise or fall of reserves. The rupee closed at 67.60 to the dollar on Friday.
The space left by the exit of US investors, led by anticipations of higher rates back home and a stronger dollar, has been replaced by Japanese investors.
Starved of decent returns for decades from fixed income and faced with the Bank of Japan’s move to negative interest rates, Japanese investors are taking to Indian debt in a big way. Fund inflows into schemes advised by Indian mutual funds almost quadrupled to 284.5 billion yen ($2.45 billion) in 2015 from 77.8 billion yen ($670 million) a year earlier, according to market data. Indian companies advising Japanese investors include Kotak Mahindra, Reliance Mutual Fund, ICICI Prudential and SBI Mutual Fund.