Banks NPAs & Recapitalisation

  

  Banks NPA's & NPA Ratios in June 2017

• As in June 2017, Banks NPAs are Rs.829,338 crores and NPA ratio is any where up to 24%. As on date  NPAs are in excess of  Rs.11,00,000 crores.
• Steadying a tottering financial system is never a graceful exercise, as American and European authorities discovered after the financial crisis. Without reform, another recapitalization is meaningless.
• The recently announced Rs.211,000 crores Banks Recapitalisation by central govt has three components:
  (i)   Budgetary support Rs.18,000 crores only.
  (ii)  PSU banks will need to go raise Rs. 58,000 crore from the market. Who will buy? May be cash rich public sector industries will be coerced to buy them. 
  (iii) The government will issue “Bank Recapitalization Bonds” for Rs. 1,35,000 crore which will be used to buy more shares in public sector banks. But these have to bought by the banks themselves. All these bonds have to be paid back in the future along with the interest by the central government. In effect, nation's future money is being pumped into today's banks recapitalisation.
• Effectively all 21 ailing banks will get additional cash of Rs.76,000 crores only, in next two years.
• Despite the roundabout method of recapitalisation, getting money into the banking system is a good policy. Having fresh equity makes it easier for them to acknowledge past mistakes and move on. Govt need to pump in ~Rs.75,000 crores every year over next few years from budget to make PSU banks vibrant.
• But every NPA has to be booked entirely by from Bank's equity only. Writing off NPAs will result in capital erosion to that extent. NPAs exceeding 10% will erode equity completely.
• Public sector banks have frozen up on lending because their capital to loan ratios will not allow any more.
• Since banks needs to have 10% of every loan from its equity, larger equity base will be helpful to some extent in resuming lending business.
• But banks recapitalisation helps adequate equity in books to resume lending of consumer deposit money.
• Any deposits withdrawal run by public will be disastrous for banks, with inadequate cash and massive deposits to service.
• But the banks lending money to its promoter (government) by buying bonds for funding additional equity acquisition of the same bank might be legal but is grossly unethical.
• With 80% NPAs irrecoverable, Banks would never initiate hard steps for recovery of these NPAs with massive haircuts contracting their equity.
• But when will they earn profits and cover up irrecoverable NPAs? With reforms and tight future lending and banks managed professionally without political influences and temptation of corruption, it would easily take over 10 years. Until then it is just hollow talk only.
• This Banks Recapitalisation exercise (equal to 1% GDP) may not increase fiscal deficit in  books, but will damage economy the way its corresponding fiscal deficit would have done or even more. 
• The best way and the only way is that banks take over NPA companies and liquidate them in auction and book losses. With what ever is left out they should draw their operations afresh and move on carefully. Any other way will be round about and postponing eventualities, achieves nothing and wastage of time & money.
• While national debt may create some assets, it also means that the present government is creating liabilities for unborn citizens reducing their ability to produce and makes them poorer.

Banks NPA situation was equally bad and needed recapitalisation ever since Modi became PM 3+ years ago. Instead of doing the right things for vibrant economy, Modi focused on vanity and spectacularity of new schemes and none of them have done any good for the economy. In fact reckless reforms like Demonetisation & GST have destroyed all sectors of economy. The only way our economy can grow and stabilise is with improving agriculture viability that enables rural spending and consumption and support the economy. But Modi & Jaitley are known for their tinkering the economy with disastrous effects only. Today, public deposits in banks in excess of Rs.1 lakh per customer are highly unsafe with RBI insurance covering up to Rs.1 lakh only!

GST deficit slowly reducing?

 

EENADU Telugu Nov 24, 2017

• GST after disrupting economy for continuously for 5 months limping towards zero deficit.
• In July 2017 it was utter choas, August ended with deficit of 29% (Rs.12,210 crores) improved in September to 24% (Rs.10,343 crores) and further improved during October 2017 to 17.6% (Rs.7,559 crores). Quarterly (Aug-Oct 2017) collection stood at Rs. 98,930 crores against target of Rs.129,042 crores with 23% deficit of Rs.30,111 crores.
• This would enlarge fiscal deficit from 3.2% of GDP to 3.5%. Already GDP growth rate took severe beating nose diving to 4 year low of 5.7% which otherwise should have been 9.1%.
• Oil prices are shooting up with current price at its 4-year high of $63.4 per barrel. The rising prices will further impact our fiscal deficit and inflation.
• The resilient Indian economy withstood impact of harebrained demonetisation and even before it recovered fully, Modi unleashed badly designed GST only to demonstrate that he is bold and his intentions of continuing financial reforms but causality is the nation and its people. Boldness is different from recklessness, he failed to grasp.
• Now, with sentiment completely destroyed, investments at standstill, informal sector decimated, agrarian sector in deep distress, construction paralyzed, empty coffers, wide ranging joblessness, dwindling exports, uncontrolled imports, rising oil prices and so on are having its adverse effects on economy, simultaneously. How long consumption driven economy will survive on a single service sector? There is no one who could pop us up from our self inflicted distressed economy.
• Any economist will tell you that the only way to boost a sagging economy is by increasing government spending on infrastructure thus creating large scale construction jobs and increasing consumption, funding it by widening fiscal space by increasing fiscal deficit even at the risk of higher inflation. Modi is just not doing that and result in near future is anybody's guess.
• Tax terrorism in the form incessant raids by taxmen and trying to impose service tax on software exports with retrospective effect from 2012 will further ruin any chances of economic recovery.
• While GST deficit might become zero by the end this financial year, after 3 quarters, it has left us in deep distress, gravely wounded and uncertain future.
• Who is responsible for this all round distress? ... The answer is Modi and his quack advised Modinomics.

Spending on infrastructure projects could be lower as sluggish GST growth have upset the government’s budget calculations and GDP growth rate is to take a further hit. The revenue shortfall could be over Rs. 80,000 crores if the current trend continues until the end of the year and will force a re-think in government spending. GST's ambiguous rules, onerous return filing system and glitches with its IT back-end have made doing business far more complicated for many companies. Frequent changes in tax rates launch have heightened business uncertainty. Hurried GST roll out had resulted in a lot of chaos and pandemonium. PSU's reduced dividend, RBI's less than half dividend all have impacted government revenues contrary to budget projection of 17% growth in tax collections. Above all, psu banks recapitalisation and rising oil prices needs to be supported from the budget. So where are we heading for?

GDP Growth rate precarious

• Economic growth is caused by (1) an increase in aggregate demand and (2) an increase in aggregate supply.
• While the increase in demand is linked to consumption and requires enormous liquidity. Where as supply increase to match increased demand requires investment and easy working capital.
• With stagnant incomes in all classes resulted in demand decrease.
• With stagnant private investment and fragile PSU Banks - working capital for industries is limited and supply side is also restricted. This also restricts exports.
• With no jobs created during past three years economic activity remained stagnant.
• Jobless growth & consumer spending growth are unsustainable beyond a point.
• Infrastructure building remained stagnant.
• Demonetization impacted informal sector sector and agriculture beyond imagination and about 5 million casual jobs evaporated.
• GST roll out resulted in inventory reduction everywhere. Mangled GST badly implemented resulted in confusion and unscrupulous traders are collected higher GST and paying nothing to Government. At least 30% dealers haven't registered with GST but are actively collecting GST and pocketing the same. Cash transactions and GST evasion is on very large scale.
• China recorded average GDP growth of 10.5% during 2003-12 but remained stable at 7.4% thereafter. This despite government's investment of trillions of dollars to enhance growth, which is unsustainable.

Modi & Jaitley should understand that country's economics are complex and there is no single pill to boost GDP growth. Having destroyed racing economy with demonetization and further impacting with mangled GST roll out without adequate preparation impacting economy greatly and GDP growth is limping at 5.7% which otherwise would have been close to 10%. Now Modi & Jaitley are facing dilemma with cash starved treasury and banks, boosting GDP growth is no easy task. With prevailing indicators revival is unlikely prior to 2019 elections.

Reliance Communications is sinking

• Reliance Communications, 7th largest telecom service provider posted its yearly loss of Rs.1,283 crores.
• Its debt stood at Rs.45,733 crores, as on March 2017, prompted banks raise red flag.
• Rating agencies downgraded RCom over debt concerns.
• In seven days, RCom stock tanked 33%.
• The lenders has granted seven month standstill on the debt.
• By Dec 2017, it will have to conclude merger deals with Aircel and sale of 52% Reliance Infratel's equity to Brookfield infrastructure for Rs.25,000 crores to pare down its debt to Rs.20,000 crores.
• Debt pile up was due to its decision to switch from CDMA to GSM and purchase of 3G spectrum at Rs.8,585 crores.
• And then company landed in debt trap i.e. borrowing money to repay debt.
• Reliance Jio's aggressive marketing has impacted smaller companies like RCom losing its subscribers. While Airtel experienced severe contraction of profits all others viz. RCom, Idea, Vodafone etc slipped into losses.
• They expect reduction in market share resulting in pressure on margins.
• In last quarter RCom lost 29.5 million customers, whereas Airtel and Idea gained 22.41 and 14.4 million customers.
• The current issue is partly due to delay in shifting from CDMA to GSM that resulted in its low value subscriber base. Initial attempts to upgrade to GSM has not yielded any good results.
• Today it has 62,000 cell sites compared to Idea-Vodafone's 273,000 and Airtel's 185,000. 
• As investments slowed so are subscriber additions, as people chose operators with superior networks.
• RCom plans to sell of its Dhirubai Ambani Knowledge City's 135 acres in Navi Mumbai and 4 Acres property near Connaught place New Delhi to retire its remaining debt.
• RCom proposed to surrender part of spectrum to escape payment liabilities to DoT. 
• Merged entity AirCom of RCom-Aircel-MTS with its 10% market share, sub optimal quality subscribers, less spectrum and debt burden will find it hard to service with its prevailing EBITDA. 
• It is even more tricky to incur capex for modernisation given its financial health and inability to raise bank loans.
• Anil Ambani's elder brother, Mukesh Ambani, might not allow RCom to die because of its name "Relaince" attached to it.

My View:

While AirTel, Idea and Vodafone continuously invested in capex, spectrum and marketing to increase its presence and value, RCom did nothing of that sort and landed in trouble. Also banks are to be blamed which funded Reliance Jio to the tune of Rs.180,000 crores only to trouble the saturated telecom sector pulling down almost all telco's with combined exposure by banks to the extent of Rs.400,000 crores. SBI Chairman expressed concerns about telco's combined EBITDA dropping to levels where debt servicing becomes hard and their loans might get turned into NPA's. Needless to say like in any other case, here too promoter owners will walk off with riches, banks will get charge of worthless assets and will have to take huge haircut. And then PSU Banks will look at centre to recapitalize them. Same old story repeating.