Indian Banks

Banks have become more cautious in lending to sugar companies following a sharp fall in prices and are working on a fresh set of borrowing limits based on lower valuations. Companies borrow against sugar stocks to pay sugarcane farmers.

In January, a number of companies got advances against a valuation of Rs 3,600 a quintal for their sugar inventories. While granting limits to sugar companies, banks take into account the previous three-month average price or the current price, whichever is lower. However, banks are now adjusting the drawing limits to the current sugar price of Rs 3,100 a quintal, says an industry source. Consequently, the drawing limit of companies has come down by nearly 14 per cent.

“We are facing working capital problems. While sugar realisation is low, we are still paying Rs 260 a quintal for sugarcane. We apprehend that some sugarcane payment arrears will build up if sugar prices do not improve. This would adversely affect the farming community and sugarcane acreage might not increase significantly. This would again lead to import dependence in the sector,” said an official of a Uttar Pradesh-based sugar major.

Most sugar companies claim that the cost of sugar production — considering the existing rate of sugarcane at Rs 260 a quintal and a 20 per cent levy of sugar at Rs 1,300-1,400 a quintal — is Rs 3,600 a quintal.

Banks allow companies to draw 85 per cent of the total value of sugar meant for open market sale. However, for 20 per cent of the sugar (which is sold to government for levy at a fixed price), companies can draw 90 per cent of the total value. “We have elaborate norms for lending to sugar companies and the adjustments are done keeping in view such norms,” said an executive with a nationalised bank.

On actual sale of sugar, companies repay the amount to banks on a regular basis. Banks, on their part adjust the limits on a weekly basis and companies are required to submit a weekly statement of stocks to the banks.

Ex-mill sugar prices had touched a record high of Rs 4,300 a quintal in January. Prices, however, started softening towards the end of January and continued to decline in February following government initiatives — like weekly sale mechanism and stockholding limits — and a decline in international prices.

However, companies continue to pay the same price to farmers as they were paying in January. Moreover, with extended crushing in states like Uttar Pradesh and Maharashtra, most companies have already exhausted their drawing limits. And with a decline in their drawing power some sugarcane arrears might build up.

The low sugar realisation has been reflecting in the share price of top sugar companies. Most sugar stocks have fallen sharply from their 52-week high in the month of January.

At the Bombay Stock Exchange, Bajaj Hindusthan has corrected over 39 per cent to Rs 146.75 from its 52-week high of Rs 242.90 on January 7. Dhampur Sugar has corrected over 49 per cent to Rs 79.80 from its 52-week high of Rs 158.60 on January 11.

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With the financial year coming to a close, commercial banks have hastened work on sprucing the health of balance sheets.

Many banks have floated one-time settlement (OTS) schemes for small and medium enterprises and tring to sell non-performing assets (NPAs).

State Bank of India, Corporation Bank, Karnataka Bank and Karur Vysya Bank have already floated an OTS each. Many others are in the process of doing so.

Bankers said while such efforts (OTS and NPA sale) are regular activity, the financial crisis and the recent regulatory fiat for increasing the provision coverage ratio are also driving them. The global financial crisis put a strain on corporate, small enterprises and retail borrowers, leading to substantial addition to gross NPAs. Plus, the Reserve Bank of India mandated banks to attain a 70 per cent loan loss coverage ratio by September 2010.

SBI chairman O P Bhatt said the bank would offer a settlement for bad loans to provide relief to small firms hit by the financial crisis. “We have got a large number of units which are stressed…We are trying to incentivise them with a one-time settlement,” Bhatt said.

Karnataka Bank chief executive Jayarama Bhat said his bank did not intent to sell NPAs, but had floated a one-time settlement scheme from which it expects to recover substantial amounts. This would also help to reduce outstanding NPAs. Its gross NPAs rose to Rs 612.3 crore (4.5 per cent) in December 2009 from Rs 451.2 crore (3.7 per cent) a year earlier.

Chennai-based Indian Overseas Bank has commenced sale of NPAs for Rs 954 crore, involving 61 accounts. Its gross NPAs rose in the 12 months ended December 2009 to Rs 3,218.3 crore as against Rs 1,718.1 crore in December 2008.

IOB executive director Y L Madan said the due diligence by prospective buyers is through and bank hopes to strike a deal soon. It would help to manage provision coverage.

Similarly, Federal Bank is in the market for sale of assets of about Rs 80 crore. Its chairman M Venugopalan said, thebank was trying to sell some NPAs, “but is not in a hurry. It wants to get better value for assets put on the block”. The outstanding gross NPAs of the Kerala-based private bank stood at Rs 790.7 crore at the end of December 2009, up from Rs 625.7 crore a year earlier.

A Mumbai-based asset reconstruction company said many banks were in the market for a sale of NPAs, but there was a gap between what value banks expect and the price ARCs are ready to offer. Banks prefer cash deals, since the payments are immediate, which add to the revenues for the year, as against securities which could take time to realise gains, based on resolution of NPAs. An SBI official said his bank would not resort to large-scale sale of bad loans. Instead, it would do continuous follow-up with borrowers to ensure better recovery than the income that could be earned by offloading bad loans to other parties.

SBI, the country’s largest lender, saw a significant rise in its gross NPAs to Rs 18,861 crore at the end of December 2009 from Rs 12,723 crore a year earlier.

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Banks’ exposure to mutual funds (MFs) fell around Rs 11,000 crore in the fortnight ended February 26, as lenders strove to meet year-end disbursal targets, aided by a rise in demand for credit.

According to the Reserve Bank of India (RBI) data, banks’ MF investments stood at Rs 1,09,453 crore at the end of February 26. Banks have maintained over Rs 1 lakh crore in MFs in the current quarter.

This is despite RBI expressing concerns about banks’ high exposure to MFs. RBI has asked banks to set limits for MF investments. On Friday, the government said RBI was reviewing the steps taken by banks to cut exposure to debt schemes of MFs. “At present, RBI is reviewing the measures initiated by banks in this regard and analysing movement of funds between banks and MFs,” Minister of State for Finance Namo Narain Meena said in the Lok Sabha. He said most banks had placed board approval limits on exposure to MFs.

Banks’ MF investments have risen significantly in the last few years. These are classified as capital market exposure and so cannot exceed 40 per cent of a bank’s net worth. Assets managed by MFs stood at Rs 767,000 crore at the end of February 28, of which debt schemes accounted for two-thirds. Banks account for a sizeable chunk of this figure. Banks park the surplus left after meeting the demand for credit in mutual funds, the call money market and RBI’s reverse repo window.

RBI Governor D Subbarao had advised banks against investing heavily in MFs during the half-yearly review of the monetary policy. Banks typically withdraw funds from MFs at the end of every quarter to meet capital adequacy requirements. MF investments carry a high risk weight of 150 per cent.

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Citi’s director for global investment banking Madhur Deora is upbeat on mergers and acquisitions (M&As) and sees no problem with high valuation demanded by Indian players. In an interview, he tells Abhineet Kumar that the rules for banking and telecom sectors could make consolidation tougher and suggests that investment banks need to be paid better for disinvestment of government stake in public sector companies. Excerpts:

The government is looking to raise Rs 40,000 crore through disinvestment next year, essentially through public offers. Are changes in the fee structure required?
You are right to point out that the fee to investment banks for the government’s disinvestment programme is very different from the fee given by the private sector. In certain cases, merchant bankers bear a substantial part of the cost of a deal. The government has a large divestment programme, whose success is very important to meet the debt target. It is critical for public sector companies to work with the most qualified merchant bankers having great technical expertise and experience, best distribution and marketing capabilities, and banks should be properly incentivised.

Will there be consolidation in the telecom sector post the auction of 3G spectrum?
It really depends on who wins the 3G spectrum and who does not. Also, it is hard to comment without clarity on the M&A policy with respect to spectrum and licence. At present, there are different restrictions with respect to M&A policy for licensees, particularly restrictions on sale within a specific period of time. Clearly, if such restrictions exist, the licensee will not be able to sell even if they want to. Companies, which are in the mid-tier and not winners of the 3G spectrum, may become consolidation targets. Whether the acquirers will be existing players or international companies interested in entering the Indian market, we will wait and see.

Is consolidation in the banking sector distinctly away, given the move on issuing fresh licences?
The Indian banking sector is very attractive whether from the perspective of new Indian entrants or foreign companies interested in entering or expanding their presence here. The move to award banking licences clearly creates an alternative route for companies to enter the sector. However, one of the key reasons why we have not seen a lot of consolidation so far is ownership restrictions for acquirers.

There are only a few banks where there are significant shareholders, and any acquirer is unlikely to be allowed to acquire more than 10 per cent, subject to RBI approval, and 5 per cent, if they already have a share in a bank.

Going forward, what sort of M&A activity do you see in India? Are we going to witness the levels seen in 2007-08?
When we think of M&A activity, we think of three different categories. One is outbound deals. We have identified a few “India Champions”, generally market leaders in their segments, who will and should acquire international companies. For ambitious companies, who want to expand their global presence, more capital is available now than it was 12-24 months ago. This, coupled with continued pressure in the western markets, will certainly lead to more transactions. We are most likely to see jumbo, multi-billion dollar transactions in the outbound arena.

Then, on the inbound side, in certain sectors, we will continue to see increasing amount of activity. In certain sectors, we have seen reasonable recovery in the global markets, and there will be more inbound activity. In some sectors, where recovery is still underway, there may still be pressure on liquidity, but we should see more activity in the next 12 to 24 months.

Also, domestic consolidation in some sectors will be very compelling.

Is valuation an issue?
Higher valuations in India are justified, as it is a high growth market and for any asset which is up for sale, there will be a lot of competition. There will be perhaps be a limited number of opportunities, especially control opportunities, which may drive up valuations. But, we will continue to see a substantial amount of inbound activity.

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Click Here – For downloading Detailed Application Form

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The country’s top lenders today said they would review the future of fixed-cum-floating rate schemes in March.

The limited period offers, which have come to be known as teaser rate schemes, are due to end by March 31.

“We will review it (special home loan scheme) sometime in March and see what kind of (credit) offtake has taken place, what kind of liquidity we have, what is the view on lending to various sectors and where we think the cost of funds is heading,” State Bank of India Chairman O P Bhatt said at the Business Standard Banking Round Table. He added that the effort would be to keep interest rates down, but if it hurt the bank, then rates would have to go up.

ICICI Bank Managing Director & CEO Chanda Kochhar and Axis Bank Managing Director & CEO Shikha Sharma said the lenders would review the rates closer to the expiry date.

The Reserve Bank of India had earlier expressed concern on the teaser rate schemes and asked banks ensure proper due diligence while extending these loans. There is expectation in the market that the schemes will end, as the RBI had tightened liquidity in the system by increasing the cash reserve ratio, the proportion of deposits that banks set aside, by 75 basis points to 5.75 per cent.

SBI, the country’s largest lender, had pioneered the fixed-cum-floating rate scheme, with interest rate in the first year fixed at 8 per cent. In the second and the third year, the rate is fixed at 8.5 per cent and then moves to a floating rate from the fourth year.

Others who had criticised SBI’s scheme then came out with similar products.

Axis Bank’s Power Advantage Home Loan scheme and ICICI Bank’s special offer came with a fixed interest rate of 8.25 per cent for the first 24 months.

A senior SBI executive said liquidity would be the key determinant. And, if RBI raised policy rates, the bank would have little room to continue the scheme. Last week, Bhatt had said SBI had an excess liquidity of Rs 75,000 crore. With Reserve Bank of India (RBI) deciding to hike CRR by 75 basis points in two stages by February end, this will impound Rs 36,000 crore from the system.

Punjab National Bank, which is nearly half the size of SBI, had said the CRR hike would soak up the bank’s liquidity by around Rs 1,800 crore. HDFC Bank had said it would be impacted to the extent of Rs 1,500 crore. (BS)

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The country’s top lenders today said they would review the future of fixed-cum-floating rate schemes in March.

The limited period offers, which have come to be known as teaser rate schemes, are due to end by March 31.

“We will review it (special home loan scheme) sometime in March and see what kind of (credit) offtake has taken place, what kind of liquidity we have, what is the view on lending to various sectors and where we think the cost of funds is heading,” State Bank of India Chairman O P Bhatt said at the Business Standard Banking Round Table. He added that the effort would be to keep interest rates down, but if it hurt the bank, then rates would have to go up.

ICICI Bank Managing Director & CEO Chanda Kochhar and Axis Bank Managing Director & CEO Shikha Sharma said the lenders would review the rates closer to the expiry date.

The Reserve Bank of India had earlier expressed concern on the teaser rate schemes and asked banks ensure proper due diligence while extending these loans. There is expectation in the market that the schemes will end, as the RBI had tightened liquidity in the system by increasing the cash reserve ratio, the proportion of deposits that banks set aside, by 75 basis points to 5.75 per cent.

SBI, the country’s largest lender, had pioneered the fixed-cum-floating rate scheme, with interest rate in the first year fixed at 8 per cent. In the second and the third year, the rate is fixed at 8.5 per cent and then moves to a floating rate from the fourth year.

Others who had criticised SBI’s scheme then came out with similar products.

Axis Bank’s Power Advantage Home Loan scheme and ICICI Bank’s special offer came with a fixed interest rate of 8.25 per cent for the first 24 months.

A senior SBI executive said liquidity would be the key determinant. And, if RBI raised policy rates, the bank would have little room to continue the scheme. Last week, Bhatt had said SBI had an excess liquidity of Rs 75,000 crore. With Reserve Bank of India (RBI) deciding to hike CRR by 75 basis points in two stages by February end, this will impound Rs 36,000 crore from the system.

Punjab National Bank, which is nearly half the size of SBI, had said the CRR hike would soak up the bank’s liquidity by around Rs 1,800 crore. HDFC Bank had said it would be impacted to the extent of Rs 1,500 crore.

(BS)

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Banks have expressed concern over the Competition Commission’s intervention on home loan pre-payment penalty, as they fear this would put pressure on costs, increase risk and even lead to higher lending rates.

Last month, the Competition Commission of India (CCI), the apex body to sustain and promote competition, sent notices to at least 15 banks, non-banking financial companies (NBFCs) and the Indian Banks’ Association (IBA) seeking explanation on why they penalise borrowers who choose to foreclose loans.

According to sources, many of these institutions have already replied to CCI, making it clear the removal of prepayment penalty would result in higher lending risk and might cause asset-liability mismatch in banks. IBA, which is the industry lobby of Indian lenders, said banks would send their responses individually to CCI as early as this week.

“IBA’s view is that this (prepayment penalty) does not violate competition laws. Moreover, if CCI insists that banks should stop penalising foreclosures, banks will have to increase lending rates by at least 0.25 per cent to cover the risk,” a top IBA official said. IBA would respond to the CCI notice this week, the official said.

CCI is believed to have observed that loan prepayment penalties will suppress competition in the home loan market by limiting the chances of borrowers switching their loans to another lender.

(BS)

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