BES171: Banking, Finance & Insurance

Money Digital Payment Monetary Policy

Evolution

BASEL, NPA, Evolution & Finance,

TBS, Bad Bank- Classification of Insurance & Fin.
Last year’s survey

+ budget17 also
This year’s survey
mentioned
NPA problem
Insolvency-
bankruptcy code
Indradhanush
etc.
 I’m Arvind Subramanian of English
fiction

UPSC got into habit of asking “Contemporary”

topics that are ~1.5-2 years old (WEF Prelim-2016)

“BES17”
I’m Chetan Bhagat of Economic
series
surveys Compress,
consolidate old
…same themes repeated
in
material
3 surveys that Arvind has Update with
written
new
NPA: 1st survey: “NPA developments
renegotiation
commission”,
3rd survey “PARA- Bad
Bank”
FAST Revision
Tax, Labour, Subsidy
reform, As much as I hate teaching
old things again, they’ve to
be taught again.
Total NPA in SCB: Rs.9.6 lakh crores (31/12/2016)
Mug up this number

PVB;
3.58 PSB; PSB
6.06
Twin
Balance
Sheet
Problem
Large Corporates
 Among
BRICS, India
has highest
NPA after
Russia 
हिन्दुस्तानियो NPA Control
करना हमसे सीखो. PSB:
- 11th Jingping 12%
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Windfall Profit Moral Hazard

Money to
Bank Open Bad 4R4D
 Twin Balance sheet & NPA problem: 3 stages

Fall in
Demand
• During • NPA,TBS
Boom • GFC,
Policy
Debt
Surge in Paralysis Servicing
Borrowing
Problem
1. Mid-2000s: all growing @9-10% Stage:1
2. India Corporates thought it’s
LPG-impact, now we’ll get twin-
digit growth like China for years! Surge in
borrowing
3. Hence heavy investment esp. in
infra projects, real estate,
highway, powerplants….bidding
& investment
4. Overleverage, high debt to equity.
39% Investment to GDP ratio

33%
Pre-Crisis 2015

क्योकि खुद के पैसे से धंधा के वल कच्चे खिलाड़ी करते है!

1. Global financial crisis: international demand Stage:2
▼; local demand ▼ (IT, aviation), textile
competition from East Asia
2. To boost demand: Price wars in aviation, Fall in Demand
telecom: bleeding balance sheets. GFC, Scams,
3. “Fiscal stimulus”: excise duty break on Policy Paralysis
automobile; parallel Aviation fuel tax ▲
4. Rupee weakened: from Rs.40/$ to Rs.70/$
[good for export, but bad for ECB & foreign
debt repayment.]
5. 2G, coal & CWG scam: Judicial activism,
policy paralysis. Mines-railways-Power
companies; PPP unable to break-even costs
due to tariff control.
6. double digit inflation: demand ▼, RBI raises
policy rate-> Lending rates ▲; difficult to
get new loans.
क्या करू? सेल्स बढाऊ तो कै से?
1. 40% of corporate loans are IC1 Stage:3
companies [Interest coverage
ratio less than 1] Debt
2. IC1 = co. not generating enough servicing
revenue to even repay loan problems
interest!
3. Ever greening of loans: new loans
to payoff interest on old loans.
4. Companies tried to selloff assets
but not getting proper price.

मुद्दल तो क्या ब्याज भी चुकाना मुश्किल है! 

 12%
PSB
9.1%
All
banks

H1
=first half

FY16
=2015-16
1. High NPA: economy collapse: East TBS
Asia (1998), US & UK (2008), but
not in India, even after TBS (2010).
Survey says
2. We’ve still managed to get decent India’s case is
growth rate. No ‘bank runs’ coz.. unique!!
3. Majority NPA concentrated @PSB,
so depositors & investors are not
fleeing due to sovereign backing.
4. Retail loans are not NPA.
5. Infra loans: excess capacity- fall in
production but not ‘collapse’.
 India-China “Growth Model” responsible for TBS?
Generous bank loans to corporates,
hoping GDP, employment = 3
stages
Phoenix scenario Containment
• % Rapid growth-> scenario
cash flow corrected, • In absolute terms of
NPA paid off GDP, NPA will shrink
and Will fade away
from public debate.
But we should not get complacent : because banks over-
cautious in lending: hurts growth and demographic
dividend.
NPA+TBS=>Banks became very cautious in lending
Not hurt
• Agri-loans: due to PSL
rules
• Home loans: good record
in Non-NPA

Less Hurt
• Corporates: can approach
capital market, issue new bond,
debentures

Most hurt
• MSME: can’t approach capital market.
• MUDRA but problems of “SPREAD”*
• {will learn in classification lecture}
• Job-loss, dem dividend, exports ▼
Bank has to increase the “SPREAD” (profit margin) when

Asset Liability

Borrower Spread Depositor

10% 7%
corporates not 2015: 1.6% People not
repaying depositing
regularly 2016: 2.7% sufficiently
And still return on assets (RoA) <
1.5!!
Banks across
world have
1.5% ROA
Punjab National Bank: एक चटु की सिंदरू शेयर की कीमत...
1300 Rising NPA,
falling profits…
lower dividends
Investors expect 
large dividend, 480
buying smaller
banks
100 72
Face 2010 2013 2016
Value
207
Q4-2015 Q3-2016
-
537
0
BASEL-III Recapitalization of PSB by 2019, 31st March

Govt: 70kCr
(IndraDhanush)
1. 8 L c r Based on performance
. neede & profitability..so PNB
d 
PSB have 9+ ___ + Capital
Market
10.8 needed __?response
• Lukewarm
• Excess preferential shares without
Capital: ___? FPO voting power: profit spent on
Shares dividends, future expansion hurt.
9% CRAR for
RWA: 120 LCr BASEL-III •
Demand higher interest else
lukewarm response
Bonds • Profitability further declines

similar reason when flipkart & other startup ‘valuation’ ▼; future expansion will be
hurt
 Twin Balance Sheet Problem and its consequences

Public Sector Banks Large Corporates

W h a t i s N PA ? W h a t h a v e w e d o n e t o f i x i t ?
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Windfall Profit Moral Hazard

Money to
Bank Open Bad 4R4D
 Classification of Bank’s assets
Gross NPA
MINUS “Provisioning”
=NET NPA

Std. Substd Doubtfu

NPA Loss
Asset . l
• 90 Days: • NPA+12 • Substandard • When Bank,
Principal / months/> +12 RBI, Auditor
Interest months/> says
overdue • Little /No
• Agri: crop salvage
season value
Early detection of
Stress?
“Special Mention Meaning
Classification
Accounts” SMA Components
RBI’s repository: Banks + NBFC with loans >5 cr.
If principal / interest not
paid
SMA-0: 1-30 days
• Multiple
SMA-1: 31-60lenders
days
SMA-2: reporting
61-90 SMA
days for single
company
• Joint Lenders Forum
(JLF)
• Corrective action plan
with majority voting
• Not working because of
4C + Media 
• <hence decentralized
Decision Making
useless> we need a
RBI “3R” Framework for Revitalizing Distressed Assets

RECTIFICATIO RESTRUCTUR
RECOVERY
N: ING:

No change Ease tenure, • SARFAESI

Act ‘02
in EMI, Interest(%), • Insolvency &
Interest ownership Bankruptcy
change Code ‘16
1. [2015] AQR: Asset Quality 3R framework
Review of borrower, then ….
2. Give additional Loan or find new
investors in project #1: Rectification
3. But, No change in tenure,
interest(%) of the old loan
1. [2014] 5/25 for Infra loans: tenure 3R framework
extended to 25 years, interest
reviewed each 5 years.
2. [2015] SDR: “strategic debt #2:
Restructuring
restructuring”: Debt (Loan) ->
Equity (Shares) & sell them to
highest bidder-> = change in
ownership.
3. [2016] S4A: Scheme for
Sustainable Structuring of
Stressed Assets: only
unsustainable portion converted
to equity (Preferential Shares) &
sold off. No change in ownership.
 Strategic Debt restructuring

SDR:
Loan->sha
c h a n g e in r es
ownership
Ordinary Shares Loan
Equity Debt

Capital
SDR: Need permission of existing shareholders; hence cases not solved much. This
“decentralized approach” not working, so we need a single “BAD BANK” (PARA),
says Survey
Proof of idiotic Hindi translation (Survey v1 ch.4), many instances in other
chapters as well..
Equity
English: Debt (Loan)
(Shares)

English Page 103

Equity Debt
Hindi:
(Shares) (Loan)!!

Hindi Page 104

if official survey (Hindi), has such mistakes, imagine the level of Hindi
“COACHING” material. So always prefer to use English resources for
success.
 Scheme for Sustainable
Structuring of Stressed Assets
S4A:
only
conv “uns
erted u s ta i
t o nable
witho prefere ” por
tion
No c u t v o nt i al
hang ting pow shares
e in o er.
Ordinary Preferential Shares w nersh
without voting power Rs. ip
Loan: 90
Shares 10

Equity Debt (100)

Capital
S4A: No Need for permission of existing
shareholders
• Because even after restructuring. Unable to revive-> NPA
• Plus, fear of 4C [Court, CAG , CVC, CBI] + Media & PR
Hence we need
a single BAD
BANK (PARA)
for faster
resolution of
NPA

FY16=
ending on H1= first half
31/3/16 of financial
year
RBI “3R” Framework for Revitalizing Distressed Assets

RECTIFICATIO RESTRUCTUR
RECOVERY
N: ING:

No change Ease tenure, • SARFAESI

Act
in EMI, Interest(%), • Insolvency &
Interest ownership Bankruptcy
Code 2016
Narsimhan-I: Banking sector Reforms (1991)
Securitization and Reconstruction
of Financial Assets and
Enforcement of Security Interest
Act (full form for bank exams)
DEB Recovery
Sarfaesi’02
Insolvency
Bankruptcy

T
tribunal ‘93
Code’16
of d n ot
u se Narsimhan-II lso d
i
Beca . ce th is a
t hi s … 1998 Sin
fix..s
o
SARFAESI Act Recovery- only Banks and Housing finance-NBFC

Not agri loans

Only secured / mortgage loans
Attach assets without court order
Bank can: auction/sale/change
BoD-management

Get stay order

Further appeal to from DRT
Banks can’t hold attached assets for >7 DRAT Fee: 12k to 1.5L
years. But, can be sold off to ARC. But must deposit
CRITICISM: ~5% cases solved in last 2
years 50% of loan dues
Hence we need BAD Bank (PARA) first
But too much backlog in DRTs & ARC unable to solve many cases 
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Windfall Profit 4R4D

Bank
 Insolvency and Bankruptcy Code, 2016

What if there was an

arbitration “outside” this
box?
 Adjudicator will workout “REPAYMENT” Plan

Insolvency
professional (IP)

सुलेमान भाई,
ध माँडवाली बादशाह

Change
5/25, Find new
tenure,
SDR/S4A investors
interest
If 75% creditors don’t approve the “REPAYMENT” plan

Insolvency professional (IP)

सुलेमान भाई,
ध माँडवाली बादशाह

Preferential > ordinary

shareholder
 IBC-2016: Appeal structure?

For individual,
For companies Partnership
NCLT firms
Goto DRT
GSM2: Insolvency & Bankruptcy board of India (1+9=10)

Law

RBI: 1
MS Sahoo 3 Ex-Officio Finance
nominated
Chairman
Government corporate

5 nominated Min. 3 full time

Selection Committee u/CabSecy

All Term: 5 years, or 65 age
All Reappointment…yes
 GSM2: (Statutory body) functions of IBBI
Insolvency & Bankruptcy board of
India
10 members; Union+RBI
Monitoring and
guidelines

Info.utilities for
DBM & I&B Fund
exchange

Insolvency pr
ofessional Ag
(IPA) (Ernst & ency
Young, S&P..
even ICAI, C )
ompanies Sec
retary
inst etc. Insolvency professional
Have register
ed with IB-bo (IP)
ard
Have to register with IPA
RBI “3R” Framework for Revitalizing Distressed Assets

RECTIFICATIO RESTRUCTUR
RECOVERY
N: ING:

No change Ease tenure, • SARFAESI

Act ‘02
in EMI, Interest(%), • Insolvency &
Interest ownership Bankruptcy
change Code ‘16
3”R”, SARFAESI, I&B studied but what about…

Farm Debt
loans waiver
Willful
Loan
Defaulter
write off
s
 SARFAESI Act: Recovery not applicable on Agri loans! 

Not agri loans

Only secured / mortgage loans
Attach assets without court order
Bank can: auction/sale/change
BoD-management

Get stay order

Banks can’t hold attached assets for >7 Further appeal to from DRT
years. But, can be sold off to ARC. DRAT Fee: 12k to 1.5L
CRITICISM: ~5% cases solved in last 2 But must deposit
years 50% loan amount
first
1. For tractor loans given before 2011, Agri loans
Sept. and Upto Rs.25 lakh pending
Haircut, One
2. Classified as doubtful / Loss cases time Settlement
on SBI. = Total 6k cr. Worth tractor “OTS”
loans. [farmer has to
pay part of the
3. One time settlement: Haircut of 40% dues]
[means you pay only 60% of the
dues back.] Upto 31st march 2017
4. Branch manager has power, 'tick box
approach', non-discretionary.
5. Earlier similar done to SME [20%
haircut] & Educational loans.
Recovered 800 cr.
Because something is
better than nothing.
1. In loan waiver- Government gives G-sec Agri loan
with long maturity to settle farm dues:
just like RIDF- bank will get the amount
back, but slowly. Debt waiver
= borrowers
2. While for short term it improves balance don’t have to
sheet of Bank. repay the dues.
3. But, will affect the culture of
"REPAYMENT". SMA/NPA will rise,
Difficult to comply with BASEL-III
(because RWA will ▲).
4. 2014: SBI opposed loan waiver in AP &
Telangana.
5. 2017: UP & Punjab 10% of SBI's farm
loans. UP alone 13k crores. Hence
opposed.
no, this will
create bad habit.
 Paan ki dukaan expressions: Urjit
Patel and Arundhati Bhattacharya ars
anti-farmer, first let off Mallya with
so much loans but won’t do it for
farmers.
And similarly, avoid paan ki dukan expressions on “demonetization”
Short term challenges and long term
benefits
Counterfeitin
Black Money Corruption
g

NPA: raise bank

Terror deposit, lower interest
rates, old loans can be
Destroying
opposition’s “wealth”
Finance settled, or new loans before UP Election…
to revive project

Paan ki dukaan expressions

3”R”, SARFAESI, I&B studied but what about…

Farm Debt
loans, waiver
Willful
Loan
Defaulter
write off
s

Loan write-off
Anti: executives will become
lax in recovering. “moral
hazard”
Balance sheet
Liabiliti
Assets
es
+balance sheet cleanup @HQ
Write-off= Bank’s taxable
income ▼=corporation tax ▼
Doesn’t erase the “right to
recover”. (“Loan Waiver”)
When recovered- $ added into
balance sheet & taxes are paid.
Both RBI & IT Acts allow this.
Stressed assets = NPAs +
Written off + Restructured loans
[SDR, S4A..]
Stressed Assets

A) SA> NPA

R) SA=NPA+Written
off+restructured

Meaning
Classification
Components

रट्टा मारो जिंदाबाद!

 NPA
Willful defaulter: ability to repay,
but not repaying.
SC asks list of defaulters 500Cr/+ SC & RBI on
“publish their names”; Defaulters
RBI: Names in sealed envelop
Can’t disclose names Unless
“willful defaulter” (=has capacity to
repay, but not repaying).
State bank of India act 1955: section
44 : Confidentiality of clients. Have
to amend act.
 Rajan, Vinod Rai: NPA and “morality” are not same.
Every defaulter is not willful Name them and shame them
defaulter unless willful defaulter
• Loan can become bad loan out of bad luck,
regulatory clearance, partners' betrayal, time
and cost overruns
• Only in Fraction of cases- criminality involved.
• Entrepreneurial wealth is not sinful. But each
should have opportunity.

Economy will “Chill” if….

• If entrepreneur is not willful defaulter, yet

tarnishing his image=> market won’t support
next project
• Entrepreneurs shy away from risk
• Banks hesitate in giving loans
• =GDP, Job creation stagnated
 TBS, NPA problem: NEXT LECTURE….

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Windfall Profit Moral Hazard

Money to
Bank Open Bad 4R4D