If There is a Default on 2 or More Cropping Season
Loan will be declared as NPA
Long Term Loans
If there is a Default on one or more cropping season
Loan will be declared as NPA
Summary
PCR - Provisioning Coverage Ratio
Why do we need Provisioning Coverage Ratio
To Avoid Bank Run → RBI has Mandated Reserve Requirements like CRR and SLR
CRR & SLR → % age of NDTL
PCR → % age of its Profits
How Much Profit Should it set aside. Depends upon
Loan Amount
Categories of Loan
Standard Asset
Sub Standard Asset
Doubtful Asset
Lost Asset
Why is the Bank Asked to do so
To Withstand the Risk that Might Arrive from NPA’s
A Case on PCR for a NPA
Std Asset PCR is 0.25% to 0.4% of Loan Amount
Depending on Category of Loan, %age varies
Agri - 0.35
Industry - 0.25
Sub Std Asset PCR is 15% of Loan Amount
Doubtful Asset PCR is 25 to 40% of Loan Amount
Lost Asset PCR is 100% of Loan Amount
Disadvantage to Bank
The Profit of Bank gets Locked Up
This is a Issue for the Bank as it hampers the Cash Flow
The Formula with Example
NET NPA Formula***
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NET NPA = Gross NPA - Provisioning
The Maths of NPA
SR - Slippage Ratio
What Percentage of My Standard Assets at the Start of the Financial Year Have turned into NPA
SR Slippage Ratio = Fresh NPA During Year / Std Advances at the Start of Financial Year
Note : NPA During the New Financial Year is Taken
Summary of Slippage Ratio
Mind Map - Fresh Accretion
Writing Off NPA
Basic Data
2016 -17 → Gross NPA → Rs 16 Lac Crores
2021 -22 → Gross NPA → Rs 7 Lac Crores
Reason for Reduction
Recovering of NPA
Write off Assets
Reasons to Write Off Data
Asset No Longer in the Balance Sheet of the Bank
No Longer Accounted Under Gross NPA → Hence Gross NPA is Reduced
No Provisioning Required → Profits of Banks are Further Freed Up
Written of Assets as per Accounting Practises can be considered as Loss in Balance Sheet
Where As, Lost Asset cannot be Shown as Loss in Balance Sheet of the Bank
By Showing or Declaring Items as Loss by means of Written off Assets → Tax Liability is Reduced
Mind Maps
Difference Between Lost Assets and Written Off Assets
Restructuring of Loan
It aims at making it easier for the company to repay the Loan by various methods
Methods used are
Method 1 - Reduce Principal Amount (Rs 80)
Method 2 - Reduce Interest
Method 3 - Extend Maturity Period
Method 4 - Give Additional Loans
Method 5 - Convert Debt into Equity
Above Methods are allowed by RBI
Unethical Practises of Banks - Evergreening of Loans
Old Loan - 500 Crore
New Loan - 500 Crore to compensate Old Loan
Additional New Loan - 500 Crore to Compensate New Loan
Mind Map
Formula
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Stressed Asset ⇒ NPA’s + Rescheduled Loans + Written Off Assets
Regulatory Forbearance
Forbearance Means Relaxation to Banks in Time of Economic Slowdown
Reality v/s Expectation
Reasons for Higher NPA
Mind Map
1. 2007-08 Credit Boom
Period of 2004-05 was that of Credit Boom
Currently in 2002 - We have Investment Rate of 30%
At that Time GDP Growth Rate was High
Due to Over Optimism we gave more Loans and Credit in the Market
2. Will Full Defaulters & Fugitive Economic Offender 3. Lacklustre Recovery of Loans by Banks - Problem wrt to DRT & SARFAESI → Hence IBC Came in 4. PSL - Loan Waiver by Government 5. Twin Balance Sheet Syndrome - Bank and Companies 6. Four Balance Sheets Problems - Bank, Infra Company, NBFC & Real Estate Company
Vicious Economic Cycle due to TBS ( Twin Balance Sheet Problem)
Reasons for Bad Loans
History of Mechanism to Recover NPA - DRT, SARFAESI, IBC
Civil Courts - Narasimham Committee Recommendation - 8 to 10 Years
DRT - Debt Recovery Tribunal - 4 to 5 Years
SARFAESI - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
Avg Time - 3 to 4 Years
IBC Code → Insolvency and Bankruptcy Code, 2016
IBC can be triggered by both Banks and the Loan Taking Company
Insolvency - I Declare that I am Bankrupt
Bankruptcy - Company Declares that I am Bankrupt
Bad Bank in the Form of
NARCC - National Asset Reconstruction Company
IDRC - India Debt Resolution Company Limited
Evolution of Framework to Deal with NPA
SARFAESI Act
Method 1 - Enforcement of Security Interest
Issue Notice of 60 Days to Defaulter to pay within the next 60 Days
If not then, Bank can sell of assets of company and recover the loan
Method 2 - Securitisation
Introduction
By Means of ARC’s - Asset Reconstruction Companies
They have to be compulsorily registered with RBI
Bank Sells to ARC at a lower price than the NPA Amount
Loss incurred by Bank in Selling the NPA = HAIRCUT
Benefit of Bank
Provisioning Capital Freed - Credit Inc - Profit Inc
Something is Better than Nothing
Process of Paying to Bank by ARC
Banks decide that when the ARC will get involved
Money is Paid in Two Parts
Cash - 15%
Security Receipts SR - 85%
Now ARC takes over Assets of Jet Airways
These Assets are managed to generate Profits
These Profits are shared with the people who have the SR
SR is
a Kind of Bond which is issued attached to a particular asset
the return on SR might be risky or erratic
there is no maturity period of a Security Receipt
What can bank do with the SR & QIB
Keep it with Themselves
Can sell it to Qualified Institutional Buyers
QIB can be Other Banks
QIB can be Big Financial Institutions
QIB buy at the same rate as the Bank gets them from the ARC
QIB cannot be Retail Investors
Proposal to allow HNI People to be QIB
QIB can be sold and brought by Another Eligible Buyers
SR is a Kind of Hybrid Instrument
in Bond - Interest is Compulsory, in SR its not sure
in SR - You cannot seek cash instead of SR like in a Bond
Hence, Its a Hybrid
An ARC can decide not to go for Reconstruction Ever, it can continue to keep holding it for as much long as it wants Reconstruction of Financial Assets
Restructuring to Recover NPA
Here by Means of RC
SR Owner is not sure when they will get the money
SR Owner may or may not make profits
It is not sure that ARC will always make Profit - Its the Business of High Risk & High Return
Examples of ARC
Biggest is - Asset Reconstruction Company India Limited
JC Flowers ARC is buying NPA from Yes Bank
Difference Between SARFAESI and IBC Act
SARFAESI
IBC
Applicable only to Secured Creditors
Applicable both to Secured and Unsecured Creditors
Applicable only to Financial Credits
Applicable to Both Financial & Operational Creditors
ㅤ
Applicable to even Home Buyers against Real Estate Companies
Focus is on Liquidation
Focus on Resolution i.e Transfer of Company
Less Comprehensive
More Comprehensive
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Note: Debenture is a Unsecured Bond
Note: IBC is much wider and comprehensive than SARFAESI
Secured Creditor - Gives Money with Collateral
Unsecured Creditor - Gives Money without Collateral
Financial Creditor can be a Secured or Unsecured Creditor
Operational Creditor - Provided Machinery or Raw Material, they haven't given money but they have provided material
Difference Between Financial & Operational Creditor
IBC Act
Mind Map
Summary
Applicability
Individuals
Covers Them, Govt Notification is Needed
But Govt hasn’t notified them yet
in UPSC Mark : IBC Covers Individuals → Mark it as Right
Companies
Adjudicating Mechanism
Individuals → DRT Debt Recovery Tribunal
Companies → NCLT National Company Law Tribunal
Can Banks and NBFC’s be Brought under IBC
Banks - No → because we already have DICGC Insurance
Latest Development - NBFC’s and Housing Companies can be brought under IBC
Threshold for Loan Amount for Invoking IBC
Individual - Rs 1000
Companies
Earlier it was 1 Lac
Now It has been made to 1 Crore because of Aatm Nirbhar Bharat Package → to Avoid Bringing MSME’s under IBC
Time Period → Maximum 330 Days
Note : Places where IBC Dont Work → SARFAESI, DRT, Courts Work
Whole Process of IBC
IBBI - Insolvency and Bankruptcy Board of India under IBC Act functions under Ministry of Corporate Affairs
IBBI Gives License to Insolvency Professionals
CoC - Committee of Creditors - Only Financial Creditors
Recent Transfer of Company of
Jet Airways to Jalan Kalrock
JSW Steel to Arsellor Metal
Voting Mechanism of CoC
Value of Voting is wrt to Loan Amount Disbursed
Total Vote Needed is 66% of Total Votes
66% should be in terms of VALUE
If the Voting Threshold doesn't Work → Assets will be sold off by means of LIQUIDATION
Triggered by
Insolvency → Triggered By Bank
Bankruptcy → Triggered by the Person who has taken Loan
New Development in IBC as a Part of Aatm Nirbhar Bharat Package is PIRP & CIRP
Difference Between CIRP and PIRP - Basics
CIRP - Corporate Insolvency Process
PIRP - Pre Pack Insolvency Process
All Companies Except MSME’s
Applicable Only for MSME’s
Original Promoters are Barred from Bidding
Aim is that the owner of MSME can continue to hold the ownership of the company
Control & Mgmt to Another Company
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CIRP Process Mind Map
PIRP Process Details
Can be Started by Debtor Only
Direct Agreement between Owner & Bank by means of Negotiation
Loan Rs 100 & Owner Says I will Pay Rs 90
Bank Goes For SWISS Challenge Method
MSME Willing to Pay 90 Rs
Company A Says I will Pay Rs 92
Company C Says I will Pay Rs 95
Bank asks from MSME that I will transfer the Company to Company C
Now Bank will asks first to MSME Owner → Which is called Right of First Refusal
Difference Between CIRP & PIRP - Final Mind Map
PIRP is Triggered by the Owner of the MSME when he feels he might default and he might lose the control of the company as well
Benefits and Challenges of IBC
Summary
IBC Came into being in 2016
Benefits
Success of Recovery Rate : 40% to 45%
But SARFAESI is 22%
Time Taken for Recovery Rate : 430 Days
BUt SARFAESI and DRT is 4 to 5 Years
IBC has Addressed the Chakravyuha Challenge of Economy
Wrapping up of Business is Difficult
Private Companies Entry is Easy
Red Tapism Reduced
Documentation Reduced
Ease of Doing Business Increased
Defence Private Companies Allowed even FDI
Hence, Entry is Easy but Exit is Difficult
Not Being Able to Exit ka issue hai ki
Factors of Production is Locked up
Leads to Inefficient Utilisation of Factors of Production
Transfer of Company leads to Efficient use of Factors of Production
Hence, It has become means of Creative Destruction
IBC has brought Behavioural Change in Owners of Company
Problems
Recovery Rate is Still Low
Still Time Consuming
High Amount Average Facade
Few Cases of High Profile Cases with Single Large Value like Bhushan Steel & JSW Steel Recovery Rate was 90 95%
Where as in Videocon Company, for a NPA of 30,000 Crores, 300 Crores was recovered
So One High Average Shoots Up, the Average Recovery Shoots Up, Doesn’t
It is the best devil out of the three devils we have
Mind Map
Note : ARC’s can now bid in IBC Introduction → Bad Banks & Their Setup
Working Mechanism of ARC (NARCL) & AMC(IDRCL)
NPA in India in 2016 to 13%
Eco Survey 2017-18 - Proposal Given
PARA - Public Asset Rehabilitation Agency ka Example hai Bad Bank
Against Bad Banks
Bad Bank Should be Set up by the Govt
Controversial Because Govt is Trying to Bail out NPA’s / Losses of Banks and Hence their Crony Capitalists Friends
When Govt wouldn't make money from the ARC and Govt would make loss and Hence Loss of Taxpayers Money
Why should Govt Bail out on the Mistake of Banks due to their Bad Lending Practises
It can in turn create Moral Hazards - Bank ki Aadat Pad Jayegi - Bank Baar Baar Wahi Galti Karega
In Favour of Bad Banks
Bank ka toh NPA ho gaya, at about 16 Lac Crore
Due to NPA → Losses → Capital Stuck in Provisioning → Credit Giving Goes Down → No Profit → Hence GDP is Going Down
But Nonetheless Bad Bank has been set in the Form of
ARC (Asset Reconstruction Company) - NARCL → National Asset Reconstruction Company Limited
AMC (Asset Management Company) - IDRCL → India Debt Resolution Company
Working Mechanism of Bad Bank
ARC are Registered with RBI under SARFAESI Act
ARC will buy LEGACY NPA’s of Value > Rs 500 Crores
Note : Minimum 500 Crores
Legacy NPA which have been Balance Sheet of the Bank for a Long Time
Total NPA it can buy is of 2 Lac Crores
Due to Which
Over All Losses of Banks will Reduce
Provision Free - High Credit - High Profit - Inc in GDP
NARCL is owned Majorly (> 50%) by PSB like SBI & PNB
It is NOT OWNED ENTIRELY BY PSB’s
Some Part of Ownership is by Private Banks also
Sponsor Bank is : Canara Bank
Finite Time of Bad Bank for NARCL is for 5 Years Only
NARCL will have specialists in understanding that at what cost should we buy that both Bank and ARC makes profit
NARCL will buy and will Exclusively Transfer to IDRCL (AMC)
IDRCL has finite tenure of 5 Years
Old Methods but Bank Immediately Apne Legacy NPA se Free Ho Gaya
IDRCL will recover NPA by Means of
DRT
SARFAESI
IBC
IDRCL can now Manage to Recover NPA by Means of
Work of NARCL & IDRCL
Here NARCL - Will only BUY NPA
Here IDRCL - Will only Manage NPA
Here Registration
Here NARCL - Registered with RBI
Here IDRCL - Not Registered with RBI, because SARFAESI is
Here Ownership
Here NARCL - Majorly Owned by PSB
Here IDRCL - Majorly Owned by Pvt Sec Banks
Loss in Recovery of NPA by NARCL & IDRCL → will be given by Government by Mens of Govt Guarantee upto Rs 30,000 Crore
Summary of Process
Institutions Mind Map
Pros and Cons of Bad Bank
Pros
Will Solve Coordination Problem
Cons
It is a Accounting Adventure
Criticised by Ex RBI Governor Raghuram Rajan
It is a Kind of Band Aid Solution when we actually need a Deep Surge
It might not have a Finite Time of 5 Years
Still a Moral Hazard - Bank ki Aadat Lag Jaayegi
Conclusion
Bad Bank is a Short Term Solution but in Long Run we need a Banking Reform to Core
P J Nayak Committee Reforms can be Suggested
Strategies and Reforms Needed
Will Full Defaulters
It is RBI’s Innovation, No Law Exists
Diversion of Loans - Mallya Took Loan on Behalf of United Beverages and In turn diverted it to Siphoning of Loans
Siphoning of Loans - Diversion for Self Use
Fugitive Economic Offender
It is by an Act - Fugitive Economic Offender Act, 2018
Director or Dy Director of PMLA (Protection of Money Laundering Act) → Director and Dy Director is of ED
Introduction Concept of BASEL Norms
BIS - Bank of International Settlement
BIS - It is Central Bank of Central Banks
BIS is Owned by 63 Central Banks across the world Including RBI
Its Role is to
Promote Coordination Between Central Banks of the World
It is Located at a Place Called BASEL, Switzerland
In BIS there is a Committee called BCBS = Basel Committee on Banking Supervision
Like Provisioning Coverage Ratio in India, at Global Level we have had BASEL Norms by BCBS
So Far we have had
BASEL 1 1988 →
BASEL 2 2004 →
BASEL 3 2010 →
One thing common to all these BASEL Norms is CAR - Capital Adequacy Ratio
CAR is analogous to PCR in India
Mind Map
Philosophy Behind CAR
Banks should have its own Capital to withstand losses arising from NPA’s
Why → Banks are Financial Intermediaries
Hence, they should have their own money in the Bank for more seriousness by the owner
under CAR - Bank has to maintain its own Capital
this Capital Should be adequate enough to combat Risk Arising out of NPA
CAR = (Capital) / (Risk Weighted Assets) ** 100
At 8% CAR and RWA 100, Capital needed is 8 Rs
At 8% CAR and RWA 200, Capital needed is 16 Rs
Types of Risks Faced by the Banks
Risks Forced by Banks Summary
What are the Other Risks that Bank Might Have
Credit Risks
Loan turn into NPA
Market Risks
Values of Banks Assets whose value may fluctuate due to Market like
Examples of Such Losses
Foreign Currency Reserve
Gold
G Secs
Operational Risks
Losses which may be due to operation of banks
Examples of Such Losses
Cyber Fraud
Infra Damage
Fine on Bank
Banking Fraud
Note : There is Difference Between Assets & Risk Weighted Assets
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CAR = (Capital / RWA) * 100
RWA Analysis and Calculation
As a Bank for a Asset, there can be a Risk Percentage Attached to it - Example - What is the Risk Asset Attached to each type of Asset is NOT Needed
CREDIT RISK
Bank has GIven Loan to the Govt - Risk % age → 0%
RWA = 0 → In All Probability Bank will recover All Money
Bank has Given Loan to the Corporate - Risk % age → 20%
RWA = 20 → If 100 Rs Loan has been Given, Recovery would be of Rs 80
Bank has Given Loan to the Corporate - Risk % age → 50%
RWA = 50 → If 100 Rs Loan has been Given, Recovery would be of Rs 50
MARKET RISK
Corporate Bond
AAA - 15%
BBB - 10%
Home Loan by Bank
5 Years - 5%
10 Years - 10%
30 Years - 15%
OPERATIONAL RISK
BASEL 3 Norms Says that Operational Asset should be Equal to 15% of Gross Income
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CAR = (Capital / RWA) * 100
Asset
Risk
RWA
Rs 100 Govt
0
0
Rs 100 Company
20
20
Rs 100 Farmer
30
30
Operational Risk
Gross Income = Rs 100
15% of of Gross Income
15
Total Asset - Operational Risk = 300
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Total RWA 100
NOTE : In the Denominator You have the Risk Asset and NOT The Total Asset
Capital Analysis and Calculation
There are Two Types of Capital
Tier 1 Capital
Going Concern Capital
Tier 2 Capital
Gone Concern Capital
With Stand Loss in the Course of Business Operation
To Fulfill Obligation of a Bank when it closes down its business activity
Common Shares are used
Preferential Shares are used
Additional Tier 1 Bond to be Discussed
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Types of Capitals
Rate of Basel Norm
World - 8%
India - 9%
Tier 1 Capital
Common Equity Tier 1 → 4.5% → 5.5%
Common Shares
Profits of Bank
Additional Tier 1 / Perpetual Bond 1.5%
Perpetual Bond - Its Maturity Period Does Not Exist
Money Raised through Issue of a T1 Bond
Can Cancel the Principal or Interest Payment due to Operational Loss
Tier 2 Capital →2%
Provisioning Amount
Preferential Shareholders Money
Tier 2 Bonds
You are entitled to get Principal and Interest Payment no Matter if it makes loss that year
Summary of Types of Capital
Summary of CAR
Components of Capital & Risks Involved → Tier 1 and Tier 2 Capital***
Evolution of BASEL Norms
Mind Map
Basel 1, 1988 - 8%
It did not take into account the market risks and operational risks
it only took into account credit risks
Basel 2, 2004 - 8%
Capital Adequacy Ratio
CR
MR
OR
Supervisory Review
Market Discipline
Basel 3 , 2010 - 8% *****
Enhanced Capital Requirement (ECR)
ECR 1 → CAR
SLR & CRR can never be used in CAR
Apart from CAR
Enhanced Component is
ECR 2 →Capital Conservation Buffer - CCB - Normal TimeECR 3 → Counter Cyclical Capital Buffer - CCCB - Boom TimeDetails of CCB and CCCB
ECR 4→ Liquidation Coverage Ratio
Bank Should have Sufficient Amount of LIquidity to Withstand Liquidity Stress
This Cash Requirement of Rs 100 should be Maintained in the Form of HQLA ( High Quality Liquidity Asset)
Note:
Here CRR cannot be accounted for LCR because it is with RBI
Here SLR can be accounted for LCR because it is with the Bank
ECR 5 → Leverage Ratio
Enhanced Supervisory Review
Enhanced Market Discipline
CAR → Numerator - Capital → Tier 1 → Type 2 → Additional Tier 1 Bond / Perpetual Bond
Recapitalization Bonds
Recapitalisation - Govt Infusing Capital Again
Why Recapitalisation - Kyunki SBI ka owner Govt Hai and Unko BASEL 3 ka Norm Maintain Karna Hai
Govt Cannot
Cannot Raise Taxes
Cant Borrow kyunki Fiscal Deficit → Acc to FRBM Govt Borrowing 3% GDP nahi ho sakta
Systemically Important Banks
Banks which are too big to Fail like Scale Based Regulation of NBFC
How Do I Know that a Bank is too big to fail - Criteria
Look at Size of Banks
Interconnectedness of Bank
Level of Complexity in Managing the Bank
Substitutability of the Bank - Can I Find a Easy Substitute of the Bank or Not
Identification of these Banks is done under BASEL 3 Norms There are Two Types of SIB
G SIB
Identified by Financial Stability Board
Qualifying Criteria is Top 75 Banks
Out of these 75 Banks, 30 Banks are chosen as Global SIB
Example
Citi Bank
Standard Chartered
HSBC
J P Morgan
D SIB
Identified by RBI
Qualifying Criteria should be more than 2% of India's GDP
3 Banks in India are D SIB
SBI
ICICI
HDFC
Hence for these Banks to Ensure that these Banks do NOT Fail
D SIB has to have to Maintain Higher CAR
Don't Remember the Dates
Difference Between G SIB and D SIB
FSB Financial Stability Board works under BIS Bank of International Settlement
LIBOR - London Indian Bank Offered Rate
It is not used in India. It is used in UK and USA and other countries
RBI wants banks to give up LIBOR and adopt ARR
LIBOR is a Rate at which two banks are willing to lend money to each other
LIBOR → London Interbank Offer Rate
It is different from Federal Fund Rate as it is managed by Federal Bank
LIBOR is Measured by International Continental Exchange (ICE)
LIBOR is important because some global banks link rate of interest on loans to LIBOR
Global Level - Bank Link ROI on Loans to LIBOR
In India - NRI - Foreign Currency Account by NRI
This account has money in Foreign Currency
Here, the ROI will be linked to LIBOR
In 2011-12 → LIBOR Scam
Banks Started Inflating Number to ICE
They would lend at less rate and tell ICE more rate
Here More than 50% Entities were inflating numbers
Hence because of this, LIBOR has lost its Sanctity
Hence RBI has asked banks to choose alternate Reference Rate
