Fearing NPAs, banks shoot off notices to malls for loan repayment

Leading public sector banks (PSBs) have shot off letters to shopping mall owners, invoking contractual obligations under the lease rental discounting (LRD) facility for loan repayments.
Fearing that these accounts might become non-performing assets (NPAs), the PSBs have directed them to raise invoices for the month of April and ask their tenants to make rental payments in the escrow account of the respective bank.
LRD is a term loan offered against rental receipts derived from lease contracts with corporate tenants.

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The move, however, has been opposed by the Shopping Centers Association of India (SCAI), which represents more than 650 modern malls and shopping centres. The association estimates that the move will impact about 50 per cent of such centres and may force them to default on payments, leading to NPAs of over Rs 25,000 crore.
The association has also brought to the notice of the Reserve Bank of India (RBI) that the three-month loan moratorium announced by it is not being offered to many mall owners.
One bank in its letter to a shopping mall company has stated that according to the terms of loan sanction, the lease rentals are hypothecated to them and that the tenants of the mall have also submitted their consent letters. Business Standard has reviewed the letter.
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Banks have an exposure of about Rs 1 trillion to shopping malls and centres, of which 75 per cent of the repayment is done through LRD or the rental income.
chartThe SCAI says retailers in shopping malls have mostly been unable to pay rentals due to the lockdown and some have even sent “force majeure” notices to landlords.
Amitabh Taneja, chairman of the association, says: “Many mall owners have received letters from their banks invoking LRD obligations. They have not extended the three-month moratorium on loans, as announced by the Reserve Bank of India, which we have bought to the notice of the RBI. The industry will see huge NPAs if we don’t get moratorium on our loans for anything between 9-12 months and loss of jobs in millions.”
Mall owners earn 85 per cent of their revenues from rentals and therefore have very little leeway to pay the differential in the amount of money that banks get from LRD.

Covid-19 relief: Staggered 180-day bad-loan breather on cards for banks

The Reserve Bank of India (RBI) and the finance ministry may take up the issue of relaxation in the delinquency period for the classification of banks’ non-performing assets (NPAs) to 180 days, from the current 90 days.
The rescheduling of accounts classified as overdue, stressed or NPAs as of December 2019 without being downgraded, and fresh funding (with a minimum repayment period of 18 to 24 months) is to be considered. This may include going easy on the insistence for additional collateral as a pre-condition by banks.

The NPA delinquency relaxation to 180 days “may be heavily qualified to prevent its abuse”, said a source. The staggered NPA relaxation glide path can be expected to have ‘start-stop dates’, which will finally settle down to the current 90-day timeline by the close of 2020-21.
The interest accrued, but not received after January 1, 2020, may be allowed to be repaid in six monthly instalments from October 1 to end-March 2021. This ties in with the possibility of the delinquency period for classification of NPAs being extended to 180 days.
A key concern is that the three-month moratorium on term loans by the central bank, and its linkage to the account being ‘regular’ to avail of the same, may lead to a situation wherein weaker borrowers come under even more stress.
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“These borrowers may default and get downgraded as NPAs under the current norms due to their inability to service the interest component on which there is no breather,” said a source.
“This is especially since sales in the June 2020 quarter will be extremely poor. Their ability to get fresh financing will also be under a cloud,” he added. The amount that banks can avail of by way of refinance from the National Bank for Agriculture and Rural Development, National Housing Bank, and the Small Industries Development Bank of India is also to be looked at.
A reference may be made to International Accounting Standard 10 pertaining to ‘events after the reporting period’. Its applicability to the Indian context is said to have been examined. Receipts, payments, recoveries, or provisions made or received up to September 30, 2020, could be considered while finalising the accounts for 2019-20 (FY20). Or an additional six months will be captured in banks’ accounts for FY20. It has been gathered that ‘talks with the Institute of Chartered Accountants of India (ICAI) have been initiated on this aspect’.
The additional provisioning norm under the central bank’s June 7 circular and incorporation of a three-month breather in its key trigger points may also be warranted. The additional provisioning banks have to comply with under the June 7 circular is as follows — 20 per cent after 180 days from end of the review period; and 15 per cent after a year; or a total additional provisioning of 35 per cent.
It was given to understand that the central bank’s insistence that the three-month moratorium ‘shall be contingent on lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19’, has been flagged off to both its senior decision-making levels and to North Block. Borrowers, especially micro, small and medium enterprises, service the interest just in time before the 90-day NPA norm kicks in. It was suggested to the RBI that it could have said the account should have been ‘standard’ — that is, it is not an NPA or a special mention account — rather than insist it should be ‘regular’.

Farm loan write-offs touch Rs 4.7 trillion in last 10 years, says report

Various states have cumulatively written off a whopping Rs 4.7 trillion of farm loans in the past one decade, which is 82 per cent of the industry-level bad loans, according to a report.
In FY19, farm loan NPAsNPAsjumped to 12.4 per cent or at 1.1 trillion of the Rs 8,79,000 crore of total bad loans in the system, up from Rs 48,800 crore or 8.6 per cent of the total NPAs of Rs 5,6,6,620 crore in FY16, the report by SBI Research said.

"Even though agriculture NPA was only Rs 1.1 trillion or 12.4 per cent of the overall NPAs in FY19, if we accounted for Rs 3.14 trillion worth of farm loan waivers announced in the last decade, agri NPAs/burden for the exchequer/banks could be as much as staggering Rs 4.2 trillion and if the latest Rs 45,000-51,000 crore of write-offs announced by Maharashtra (second in three years) this it could be at Rs 4.7 trillion which is 82 per cent of the industry level NPAs," the report claimed.
It can be noted that since FY15, ten of the largest states announced farm loan waivers worth Rs 3,00,240 crore to alleviate the indebtedness of farmers and the spate of suicides. If the numbers announced by the Centre under Manmohan Singh regime in FY08 is counted, this goes up to around Rs 4 trillion.Of this, over Rs 2 trillion have been made since 2017.
In FY15 Andhra announced to write off farm loans worth Rs 24,000 crore, in the same year Telengana too did so involving Rs 17,000 crore. FY17 saw Tamil Nadu announcing write-offs of Rs 5,280 crore. FY18 witnessed Maharashtra writing off Rs 34,020 crore; Uttar Pradesh (Rs 36,360 crore); Punjab (Rs 10,000); and Karnataka (Rs 18,000 crore), and another Rs 44,000 crore in FY19.
In FY19, Rajasthan written off Rs 18,000 crore, Madhya Pradesh (Rs 36,500 crore), and Chhattisgarh (Rs 6,100 crore) and Maharashtra's Rs 45,000-51,000 crore announced last month is the latest.
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But, it is entirely a different matter that most of these write-offs have been only in paper as actual write-offs have not been more than 60 per cent, while the lowest delivery has 10 per cent in Madhya Pradesh.
Another interesting finding is that the years when farm loans were written off, there has been a massive fall in fresh farm loan intake. For instance in FY18, when Maharashtra, Karnataka and Punjab announced farm loan waivers, the annual growth in fresh loan disbursement was a whopping (minus) - 40 per cent in Maharashtra, a paltry 1 per cent in Karnataka and 3 per cent in Punjab, the report noted.
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Over the years, kisan credit cards have became one of the most popular for agricultural loans, mainly because of the interest subvention scheme and the 5 per cent incentive for prompt repayment incentive offered by the Centre (for up to Rs 3 lakh per borrower).
At the end of March 2019, the KCC loans aggregated to about Rs 6,68,000 crore constituting about 60 per cent of the total agricultural loans.
Majority of our farmers are indebted because around 70 per cent of the farm land is being cultivated by tenant farmers and not land-owning farmers, and hence is not entitled to getting any benefit, as being not the owner of the land.
Also, barring Kerala, which has enacted the Money Lending Act, protecting borrowers from usurious rates of interest that incidentally protected tenants from excesses in private debt, no other state offers such legal safeguard to farmers.

Slowdown, credit squeeze to increase NPA, but banks more resilient now: RBI

After witnessing a fall in the gross non-performing assets (NPAs) ratio in March 2019 — the first time in seven years — Indian banks’ GNPA ratio is set to rise again, as a slowing economy and shrinking credit make the share of bad debt in the loan book larger, according to the half-yearly Financial Stability Report (FSR), released by the Reserve Bank of India (RBI) on Friday.
The system has, however, become better in terms of resilience since since March, the reference point used by the last FSR, thanks to the recapitalisation by the government and measures taken by the central bank, the latest report said, adding that the collapse of any large housing finance company won’t pose as big a risk as it had six months ago.

The gross NPA ratio of banks may increase from 9.3 per cent in September 2019 to 9.9 per cent by September 2020 “primarily due to changes in the macroeconomic scenario, a marginal increase in slippages, and the denominator effect of declining credit growth”, it said.
The report is prepared by the sub-committee of the Financial Stability and Development Council (FSDC) and is released by the RBI. Earlier this week, the Trend and Progress Report had said “further improvements in the banking sector hinge around a reversal in macroeconomic conditions”.
Risks posed by geopolitical uncertainties remain an overhang for the overall financial system. Exports might suffer, but the current account deficit would remain under control, the report said. “Reviving the twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge,” the FSR said.
Aggregate demand slackened in the second quarter of 2019-20, further extending the growth deceleration. Writing the foreword of the report, RBI Governor Shaktikanta Das said the challenge was to “ensure transmission of monetary policy impulses to the advantage of real economies and not to aid build-up of froth in financial markets. We need to be mindful of the ‘cobra effect’ ”.
Slowdown, credit squeeze to increase NPA, but banks more resilient now: RBICobra effect refers to the situation when a solution to a problem makes the problem worse. On its part, the RBI has endeavoured to provide a responsive and proactive monetary policy in an economic environment wherein sources of vulnerabilities are continuously interacting, Das said, reemphasising the importance of good corporate governance across the board, which, according to the governor, “is the most significant factor that can lift the efficiency of our economy to its full potential”.
While the banking sector shows signs of stabilisation, PSBs should improve their performance and should build buffers against disproportionate operational risk losses, while “private sector banking space also needs to focus on aspects of corporate governance,” the governor said.
The market is becoming more discerning on prudential concerns around NBFCs, which continue to show signs of restructuring of their underlying business models, according to the RBI governor.
Credit growth of banks was 8.7 per cent year-on-year in September, while deposits grew 10.2 per cent. This is the first time since Q2FY17 that credit growth fell short of deposit growth, the report observed. Credit fell ‘across the board’ for commercial sector. However, private sector banks registered credit growth of 16.5 per cent.
While the GNPA ratio remained unchanged at 9.3 per cent between March and September 2019, the provision coverage ratio (PCR) of the banking system rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019 “implying increased resilience of the banking sector”, the report said.
Bilateral exposures between entities in the financial system witnessed marginal decline. Private sector banks saw the highest YoY growth in their payables to the financial system, while insurance companies recorded the highest YoY growth in their receivables from the financial system. The size of the inter-bank market continued to shrink with inter-bank assets amounting to less than 4 per cent of the total banking sector assets as at end-September 2019, the report said. This reduction, along with better capitalisation of public sector banks reduced the contagion risk under various scenario compared with March 2019.
Still, banks may have the capital adequacy ratio below the minimum regulatory level of 9 per cent by September 2020 without considering any further planned recapitalisation, the report said. If the macroeconomic conditions deteriorate, five banks might record the capital adequacy ratio of below 9 per cent under a severe stress scenario.
However, the report said 49 of the 52 banks would remain resilient for meeting day-to-day liquidity requirements in case of sudden and unexpected withdrawals of around 10 per cent of the deposits and utilisation of 75 per cent of the credit lines.
The RBI’s latest systemic risk survey (SRS) showed that all the major risk groups, such as global risks, risk perceptions on macroeconomic conditions, financial market risks and institutional positions were perceived as medium risks affecting the financial system. But the “perception of domestic growth risk, fiscal risk, corporate sector risk and banks’ asset quality risk increased between the earlier survey (April 2019) and the current survey.”
The survey participants felt that resolution of the legacy bad assets under the IBC was essential to enable the banking system to support the aspirations of economic growth.
According to another set of survey of 13 banks with regard to assets that were initially assigned to be resolved through the prudential framework (as of June 30), an inter-creditor agreement is yet to be signed for exposures amounting to Rs 33,610 crore while the same has been signed with respect to aggregate exposures of Rs 96,075 crore. However, resolution plan has been implemented only with respect to one borrower with a reported exposure of Rs 1,617 crore.
Mutual funds were the largest net providers of funds to the financial system. Their gross receivables were around Rs 9.40 trillion, or around 37.8 per cent of their average assets under management (AUM) as on September 2019, and their gross payables were around Rs 57,355 crore as at end-September 2019. The top-three recipients of their funds were banks followed by NBFCs and HFCs.