Indian Banks

Asharp rise in provisioning for bad loans lowered the net profits of public sector banks in the second quarter of this financial year. Most banks saw an increase in non-performing assets (NPAs) on back of rising interest rates and migration to an automated recognition system.

Mumbai-based Bank of Baroda (BoB) posted an increase of 14.4 per cent in net profit at Rs 1,166 crore in the quarter ended September, provisioning for bad loans more than doubled to Rs 298 crore as compared to same quarter, last year. “Increase in NPAs was seen from all sectors and geographies,” said M D Mallya, chairman and managing director. He said Rs 663 crore worth of assets were restructured quarter and 10-11 per cent of the total restructured portfolio slipped into NPAs in July-September.

All government banks were mandated to shift to an automatic NPA recognition system by the end of September. Also, adding to the pressure on banks’ asset quality was the monetary tightening by Reserve Bank of India as it raised policy rates 13 times since March, 2010.

Higher provisioning dragged Bangalore-based Canara Bank’s net profit 15.4 per cent, to Rs 852.2 crore during the reporting period. The higher provisioning was because the bank has migrated all accounts to the automated NPA recognition system. “We have taken a hit on our net profit mainly because of higher provisions towards NPAs to the tune of Rs 553 crore, higher by 3.5 times over the corresponding quarter,” S Raman, chairman and managing director, said.

New Delhi-based Oriental Bank of Commerce which has seen provisioning for bad loans and writeoffs more than double to Rs 485 crore in July-September this year, reported 58 per cent decline in net profit to Rs 167 crore.

An increase in bad loans also weighed on Corporation Bank which reported 14 per cent rise in net profit at Rs 401.11 crore. The gross NPAs of the bank rose 1.32 per cent at end-September from 1.05 per cent in the same period of the previous year. According to the management, the major source of addition to bad loans were small and medium enterprises and the agriculture sector.

Led by a higher yield on advances and lower provisioning, Kolkata-based UCO Bank posted a 94 per cent rise in net profit to Rs 231 crore for the quarter ended September 30, against Rs 119 crore in the same period last year.

Dena Bank reported 20.8 per cent rise in net profit at Rs 193.58 crore for the quarter ended September 2011. Its net interest income was up 16.43 per cent at Rs 514.9 crore.

United Bank of India posted a 13.7 per cent rise in net profit to Rs 124.77 crore for the quarter ended September against Rs 109.7 crore in the same period last year. The bank’s slippages more than doubled at Rs 623 crore in the last quarter, against Rs 203 crore in the same period last year. “More than 50 per cent of the slippages are on account of mid-corporate accounts; the rest is contributed by small ticket advances,” said Bhaskar Sen, MD and chairman.

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ICICI Bank, the country’s largest private sector lender, on Monday said its consolidated net profit for the quarter ended September 30 surged 43 per cent to Rs 1,992 crore, compared with Rs 1,395 crore a year ago. The rise was aided by higher earnings of the bank’s life insurance arm, ICICI Prudential Life Insurance Co.

ICICI Prudential Life Insurance Co reported profit after tax of Rs 350 crore during the quarter, compared with Rs 15 crore a year earlier. The higher profit was primarily due to the change in accounting for non-participating policyholders’ funds.

On a standalone basis, the bank’s net profit stood at Rs 1,503 crore during the three-month period, up 22 per cent from Rs 1,236 crore a year earlier. The growth in standalone profit was driven by lower provisions and higher interest income from advances.

Net interest income, or the difference between interest income and interest expenditure, rose 14 per cent year-on-year to Rs 2,506 crore. Fee income rose seven per cent to Rs 1,700 crore. The bank’s net interest margin was 2.6 per cent, unchanged from a year ago.

“We had a very healthy growth in profit, clearly keeping in line with our strategy of resuming growth from this year. Our aim would be to keep the net interest margin stable. The lending rates may rise if there is any increase in the cost of funds,” Chanda Kochhar, managing director and chief executive officer, ICICI Bank, said in her post-earnings comments.

Asset quality
The bank cut its provisions by 50 per cent, compared to a year ago, to Rs 319 crore during the quarter, due to improvement in the quality of its assets. The lender closed the quarter with a provision coverage ratio of 78.2 per cent. Net non-performing advances narrowed to Rs 2,184 crore from Rs 3,145 crore a year ago, leading to a 69-basis point rise in net bad loan ratio at 0.93 per cent. The gross non-performing loan ratio also rose by 89 basis points to 4.14 per cent as of September 30.

Net restructured assets stood at Rs 2,501 crore. The bank restructured Rs 743 crore of loans during the quarter, a significant share of which was accounted for by the microfinance sector.

Kochhar said the bank’s asset quality appeared to be stable and dismissed fears of the deteriorating quality of loans to the power sector. Advances to power companies accounted for about seven per cent of the bank’s loan portfolio.

Balance sheet
The bank’s advances increased 20 per cent year-on-year to Rs 233,952 crore, driven mainly by growth in corporate loans. “There has been some moderation in the growth of retail loans. While we are seeing growth in both corporate and retail advances, the growth is clearly higher on the corporate side,” Kochhar said. ICICI Bank aims to increase its advances by 18 per cent this financial year. The bank’s deposits rose about 10 per cent year-on-year to Rs 245,092 crore as of September 30.

The share of low-cost current account and savings account deposits to the total deposits improved sequentially to 42.1 per cent. Savings account deposits stood at Rs 70,149 crore, while current account deposits were Rs 32,997 crore.

The bank’s capital adequacy ratio was 18.99 per cent, while its Tier-I adequacy ratio was 13.14 per cent.

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The Reserve Bank of India’s decision to automate the process of filing regulatory reports appears to have opened a door of opportunities for technology firms. Industry players expect banks to invest over Rs 500 crore over the next one year to migrate to the new system of automated data flow. Mid-sized software companies are also sensing an opportunity to cross-sell their other banking software products along with the automated data flow solution.

For instance, iCreate Software, a Bangalore-based information technology firm, has already secured contracts from HDFC Bank, IndusInd Bank and Dhanlaxmi Bank within three months of launching their automated data flow solution Biz$core ADF. IndusInd Bank has decided to use iCreate’s enterprise business intelligence solution along with the automated data flow software. While the latter will help the bank in meeting compliance needs, the business intelligence solution will aid in managing information effectively for business requirements.

Vivek Subramanyam, chief executive officer of iCreate, stressed the need for a technology solution to remove manual intervention in regulatory reporting. “Automated reporting increases the level of confidence on data, and decision-making becomes more accurate,” he told Business Standard. “There are 150 to 250 types of regulatory reports that banks have submit to RBI at periodic intervals. We are completely focussed on this opportunity and are engaging with the entire banking fraternity to position our Biz$core ADF solution.”

He said the company’s automated data flow solution cost “single to early double digits” crore of rupees.

In August, Ramco Systems, a software firm in Chennai, launched an automated data flow solution to help banks adhere to RBI guidelines on submission of regulatory reports without manual intervention. “Our ADF solution,” says Kamesh Ramamoorthy, chief operating officer of the Chennai-bases software firm, “can be deployed on any database management system. It can go live within weeks.”

However, some banks are likely to rely on their in-house teams to develop this software instead of outsourcing it to a technology firm. According to a senior official of a Mumbai-based private sector bank, if the in-house technology team of a bank is strong, then developing the software makes more sense as the lender can customise the solution according to its requirements. Another option is that the bank will build the software on its own, but will seek assistance of a technology firm for integrating it with the main system.

But most banks are expected to use third-party software as they have to comply with RBI’s guidelines within a specified time period. “It is not their core operations,” says an industry expert. “Hence, they will choose products of software companies to meet the guidelines.”

The new guidelines on automated regulatory report filing were released after the central bank was alarmed by the trend of eroding profitability of state-run banks soon after the retirement of the chairman. The move is aimed at minimising the scope of errors and manipulation in reports that are submitted to RBI at periodic intervals by banks.

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Indian insurance companies would spend $1.8 billion on information technology (IT) products and services in 2012, an increase of 11.7 per cent over the expenditure of $1.6 billion in 2011, according to Gartner Inc. The forecast includes spending by insurers on internal IT, hardware, software, external IT services and telecommunications.

Telecommunications represents the biggest spending category, and expenditure on this is estimated to touch $566 million in 2012, up from $512 million in 2011. However, spending on IT services is expected to grow the fastest in 2012, with the expenditure standing at $447 million in 2012, a rise of 15.8 per cent compared with $386 million in 2011, according to the study.

Indian insurers are faced with an opportunity to transform significant aspects of their operations through technology, across the entire insurance business value chain.

“Indian insurers have shown they are particularly forward, with regard to considering alternative delivery models such as business process outsourcing,” said Derry Finkeldey, principal analyst, Gartner. “External factors, such as regulatory change, uncertain economic conditions and the increasing frequency of catastrophic events, are forcing insurers to reassess their approaches to business processes and the IT applications that enable them to derive greater efficiency and achieve more with less.”

“Insurers are looking for ways to streamline their processes, from the front office to the back office, and are investing in the next generation of core solutions to help them do that,” said Finkeldey. “These solutions often integrate business process management and analytics capabilities, or are offered in an ‘as a service’ model,” he said.

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Bankers continue to fret over the quality of assets, as the Reserve Bank of India (RBI) gears up to review the monetary and credit policy for 2011-12 this month. At the pre-policy meeting, in which the apex bank takes stock of liquidity conditions and credit demand, bankers said more rate increases would further hurt the repayment capabilities of borrowers.

Bankers also sought that the regulator allow the restructuring of accounts for a second time. “We have made a suggestion to consider the need for second-time restructuring for companies or units whose debt was reworked once, after the financial crisis in 2008,” said a senior banker who attended the meeting.

RBI has raised key policy rates 12 times since March 2010 to tame the persistently high inflation. It is scheduled to announce the half-yearly review of monetary and credit policy on October 25.

“Overall, there is pressure as far as asset quality is concerned,” said M D Mallya, chairman and managing director of state-owned Bank of Baroda. The repo rate, at which banks borrow from RBI, has been raised by 150 basis points, including two 50-basis point rises, since the start of the current financial year. Most banks have passed on the increase in cost to customers, leading to concern that high lending rates may result in more defaults.

An increase in non-performing assets (NPAs) would also translate into a higher need for provisioning, according to RBI norms. “The problem of NPAs and slippages is equally worrisome in case of corporates, in addition to small and medium units,” said Mallya. Pointing to the sectors under pressure, Mallya said, “One is the textile sector, which has gone into trouble because cotton prices have come down substantially. The other is the steel industry.”

The demand for credit has declined, since interest rates continued to rise. “Credit growth is muted, capex is virtually at a standstill and investment is not really happening,” K Ramakrishnan, chief executive of the Indian Banks Association, told reporters after attending the meeting.

According to RBI data, credit growth slowed from 20.6 per cent in March to 19.8 per cent in August. Ramakrishnan said banks were only disbursing past sanctions.

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The Reserve Bank of India (RBI) has allowed banks and non-banking financial companies (NBFC) to sponsor infrastructure debt funds (IDF), which can be set up as mutual funds and NBFCs.The move follows Finance Minister Pranab Mukherjee’s announcement in the 2011-12 budget of setting up of IDFs in order to accelerate and enhance the flow of long-term debt in infrastructure projects.Infrastructure debt funds which can be set up as NBFCs should have a minimum net-owned fund of Rs 300 crore and a capital adequacy ratio of 15 per cent, the RBI said in a statement.

IDF SET UP AS MF
Banks acting as sponsors of infrastructure debt funds as MFs have been subjected to existing limits, including limits on investments in financial services companies and on capital market exposure. A bank’s capital market exposure has been capped at 40 per cent of its net worth, both through direct and indirect routes.In case of NBFCs, it should have a minimum net owned funds (NOF) of Rs 300 crore to act as a sponsor, and should be able to maintain the same level of NOF even after investing in the fund. Also, the NBFC should maintain a capital adequacy ratio of 15 per cent after investment. The entity should also have good track record for five year and been profitable for the last three years.

IDF SET UP AS NBFC
Banks and NBFCs keen on sponsoring an IDF-NBFC must contribute at least 30 per cent and a maximum of 49 per cent of the total capital of the fund, besides meeting the other requirements prescribed for floating an IDF-MF. “The guidelines will be big boost for the infrastructure sector which needs long term funds. NBFCs taking part in it would be able to diversify their borrowing portfolio. We have other fund like gold fund. Hence we would be keen to launch an infrastructure debt fund,” said G S Sundararajan, managing director of Shriram Capital.

RBI further said an infrastructure debt fund set up as an NBFC should have a minimum net worth of Rs 300 crore and at the least should have a credit rating of ‘A’ or its equivalent by CARE, Fitch, Icra and Crisil. The NBFC’s Tier-II capital should not exceed Tier-I capital, while the minimum capital adequacy ratio should be 15 per cent.

“For the purpose of computing capital adequacy of the IDF, bonds covering PPP and post commercial operation date projects in existence over a year of commercial operation shall be assigned a risk weight of 50 per cent,” said RBI.The fund can have an exposure of up to 50 per cent towards a borrower or a group of borrowers. The limit can be increased by up to 60 per cent if the board of the IDF-NBFC agrees. Limited additional extension beyond 60 per cent can be granted only after RBI approval.

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With the rupee showing a freefall and hitting a 28-month low against the dollar, India Inc has yet another headache.

While the obvious gainers are export-led sectors like information technology and the biggest losers are oil marketing companies, most companies are putting up a brave face.However, they expect the splinters of the currency turmoil to hit them at a later stage.Business Standard spoke to a number of finance chiefs. Though most put up a brave front, very few wanted to talk on record, claiming it was premature to draw a conclusion.

R Shankar Raman, chief financial officer (CFO), L&T, said. “This is a time of unprecedented fluctuations. So, it’s wise to mitigate your financial risks, rather than use currency risks as an opportunity. L&T has a billion dollars of foreign currency debt.

So, we try to carefully hedge ourselves, swapping some of it into the rupee or buying forward. But the splinters would catch us. Fortunately, most of our operations are in India. So, our business model allows us to remain relatively insulated.”Most are betting on the fact that this is temporary. “While RBI (Reserve Bank of India) is continuously buying dollars, there is no corresponding supply coming in, from foreign direct investment, external commercial borrowings or foreign institutional inflows. For exporters, the incentive to forward-sell dollars has gone down significantly. But this is not a long-term scenario. The US economy is not that strong to prop up the dollar like this.

As a corporate, I don’t think we would take any steps on our foreign currency exposures at this volatile juncture, as the rupee has already depreciated,” said Prabal Banerjee, CFO, Adani Power.Many companies have foreign currency loans on their books, either as working capital for foreign operations, or acquisition-related debt. But CFOs at most large business groups feel despite a depreciating rupee, keeping the benign interest rates in developed markets like the US in mind, it would be better to hold on to foreign currency debt. “You get 0-2 per cent interest on dollar debt, compared with 12-14 per cent on rupee debt. The rupee has only depreciated 10 per cent. But in this volatile environment, I don’t know for how long the advantage would sustain,” said an executive director of a leading private sector airline.Sectorally, a falling rupee is bad news for importers and oil marketing companies, which import their main raw material, crude oil. For nationalised oil marketing companies, the under-recovery in price-controlled products like diesel, kerosene (public distribution system) and domestic liquefied petroleum gas would go up further. With every fall in the rupee, the under-recovery goes up by Rs 9,500 crore per year on these controlled products.Large metal companies like Tata Steel, Hindalco and Vedanta have foreign currency debt on their books. However, as Sunirmal Talukdar, CFO, Hindalco, points out, “A depreciating rupee is beneficial for us, as the domestic price of aluminum or copper rises. Hindalco has repaid a billion dollars of its foreign currency loans taken for the Novelis acquisition. The only foreign currency exposure we have is about Rs 3,000 crore of buyers’ credit for the import of copper concentrates. But the exports offer a natural hedge for us.

”Tata Motors, like Tata Steel, also has foreign currency exposure. But analysts don’t see much of an impact for the company, as 60 per cent of revenues for Jaguar Land Rover are dollar-denominated and are converted to pounds. The dollar-pound movement is likely to hit the company more.The biggest gainers are information technology companies. A weak rupee means a positive impact of at least three per cent on revenues from India for the top four Indian information technology firms. Every one per cent change in the rupee-dollar exchange rate has a 40-basis point impact on the margins, and an impact of at least two-3.5 per cent on the net profits of these firms. Rostow Ravanan, CFO, MindTree, believes the real benefit of the depreciating rupee would only be seen if it remains at this level in the third quarter.

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Volatility in exchange rate to stay, says Gokarn; RBI intervention only to target excess in this regard. The Reserve Bank of India’s intervention in the foreign exchange market on Friday helped the rupee to rebound after hitting a 28-month low yesterday.The rupee closed the day at 49.43 per dollar, stronger than Thursday’s close of 49.58, when it suffered the biggest single-day loss in 15 years. Intra-day, it went close to breaching the psychological 50-mark, to 49.90 levels, dealers said. However, the RBI is likely to have sold dollars from around 49.60 per dollar, which helped the rupee.Subir Gokarn, RBI’s deputy governor, who is on a visit to the US, said on a television channel that volatility in the currency exchange rate had become “a part of the game” and RBI intervenes to curb excessive volatility.

“Your investment or return calculations have to take that (volatility) into account and you have to decide how you are going to hedge that risk,” he said.RBI had not intervened in the foreign exchange market for nine months in succession, till July. However, it had stepped in to stem the rupee depreciation on three occasions over the past week.Gokarn reiterated RBI’s stance, on intervention only to smoothen excessive volatility in the exchange rate. “We, at this point, do not see any intervention from a rate-targeting viewpoint. That would reflect a change in policy stance, which we are not doing at this point. If we do intervene at all, it will be with a very narrow objective, of smoothening what might be a very volatile market situation; nothing beyond that,” he said.Adding: “There is larger logic and context to our exchange rate policy and we have, over the last few years, allowed the rupee to float within the broader structural boundaries of debt limitations or debt restrictions. That policy remains.”Traders said the rupee would not be able to stay strong. Growing concern on the impact of a possible Greek default on the banking sector would negate any move by India’s central bank to support the rupee.According to Kotak Mahindra Bank’s chief economist, Indranil Pan, the rupee could witness further depreciation. “The sudden weakness has been led by the recent risk aversion globally. The Indian currency could be poised for more near-term depreciation with the absence of any intervention from the RBI,” he said.In the near term, there appears a risk of the rupee breaching the 50-mark, but from a more medium-term perspective, we should see the rupee settle in a range of 46-49, unless there is an absolute meltdown in the global markets, Pan added.

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