Banking industry in India Banking industry in India The size of Indian banking industry is USD 1.2...

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  • Banking industry in India

     The size of Indian banking industry is USD 1.2 trillion

     Loans of USD 650 billion to the industry

     RBI has introduced various regulations since FY14 requiring Banks to recognize NPAs and make

    adequate provisioning

     Increase in stress in Corporate Balance sheets

     Need for capital (equity) to revive businesses

     Huge interest from international distress funds in last 12 months

    OUTSTANDING CREDIT (USD bn) GROWTH (%)

    DETAILS FY12 FY16 FY17 CAGR (FY12 - FY16) FY17

    Overall Bank Credit 712.09 1,159.06 1,216.99 12.0 5.0

    Agriculture & Allied Activities 84.40 136.32 144.06 12.7 5.7

    Industry 299.12 421.63 401.66 9.0 -4.7

    Micro & Small 36.55 57.36 55.00 11.9 -4.1

    Medium 19.27 17.73 15.52 -2.1 -12.5

    Large 243.32 346.54 331.16 9.2 -4.4

    Services 157.95 237.95 248.90 10.8 4.6

    Trade 34.74 58.84 60.88 14.1 3.5

    Commercial Real Estate 17.40 27.42 27.50 12.1 0.3

    NBFCs 36.01 54.46 49.33 10.9 -9.4

    Personal Loans 120.87 214.96 237.83 15.5 10.6

    Housing 61.31 115.31 126.64 17.1 9.8

    Credit Card Outstanding 3.15 5.82 7.61 16.5 30.9

    Vehicle Loans 13.76 23.61 26.12 14.5 10.7

    Source: RBI

    Growth in Bank Credit : Sector-wise (%)

  • Stress in the Indian Banking sector

    The banking distressed assets have increased to an all time high and are expected to continue rising in the short term. The increase in distressed assets has largely been because of lack of prudent lending, policy lapses at the Government-level, and a weak judicial and regulatory environment.

    Source: RBI for NPAs; Credit Suisse for Debt Share Percent of debt owned by comapnies that have interest coverage less than one, where cash flow is measured by EBIT (Earnings Before Interest and Taxes). Based on sample of 3,700 listed non-financial companies. Debt Share numbers are for end-March for 2013-2016.

    Share of Debt Owned by Stressed Companies*

    Gross NPA Ratio (Percentage of Gross Advances)

  • Stress in the Indian Banking sector

    Figures for March 2018 and September 2018 are estimates, shown under three business scenarios

    Gross bad loans of banks under PCA September ended Quarter 2017

    Gross Non-Performing Assets as % of Gross Advances

    Source: RBI Financial Stability Reports

     11 PSU Banks put under Prompt Corrective Action (PCA) by RBI. Reserve Bank of India not just monitoring but actively involved in revival of these Banks.

     Five more Banks (Punjab National Bank, Union Bank of India, Andhra Bank, Canara Bank and Punjab & Sind Bank) also likely to be put under PCA

    BANK GROSS NPA (USD in billion) GROSS NPA RATIO

    IDBI Bank 7.93 24.98%

    Indian Overseas Bank 5.36 22.73%

    UCO Bank 3.77 19.74%

    United Bank 1.99 18.80%

    Bank of Maharashtra 2.66 18.54%

    Central Bank of India 4.89 17.27%

    Dena Bank 2.04 17.23%

    Oriental Bank of Commerce 4.08 16.30%

    Corporation Bank 3.19 15.28%

    Allahabad Bank 3.31 14.10%

    Bank of India 7.61 12.62%

  • Industry-wise NPA data

    Top 10 Sectors having highest NPAs for Scheduled Commercial Banks

  • Regulatory Environment

    Insolvency and Bankruptcy Code (IBC) 2016

     IBC is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy

     IBC aims to resolve insolvencies in a time bound manner (within 180/270 days)  IBC aims to transfer control from existing promoters to lenders  IBC aims to resolve the confusion caused by earlier complex regulatory and judicial

    environment.

    Bankruptcy & Insolvency Adjudicator

    o National Company Law Tribunal governs Corporate Entities o Debt Recovery Tribunal governs individuals and Partnership

    Firms

    Insolvency Regulator

    o Insolvency and Bankruptcy Board of India will be governing body for all the insolvency proceedings in the country

    o With effect from December 1, 2016 BIFR and AAIFR stands dissolved

    Insolvency Resolution Professionals

    o Identifies financial creditors and constitutes a creditors committee for 75% majority vote

    o Creditors committee has to decide to proceed with a revival plan or liquidation within a period of 180 days which may be extended to a period not exceeding 90 days

    Insolvency Resolution Process

    o Application of Default o Appointment of Insolvency Professional (IP) o Moratorium Period (180/270 days) o Formation of Credit Committee o Goes into Resolution Plan / Liquidation

    Liquidation Process

    o Application on Default o IP may act as a Liquidator o Formation of a Liquidation Trust o Invite claims from creditors o Dissolution of the Corporate Debtor o Dues of secured creditors & workmen shall have priority over o Statutory dues and all other dues

    ★ Further emphasizes the resolve of Regulator and Government towards improving the stretched NPL position

    ★ Current bankruptcy system is highly fragmented with multiple judicial forums, the Code provides for a specialised forum to oversee all insolvency and liquidation proceedings

    ★ Under IBC, existing promoters have been barred from bidding to reclaim their own assets.

  • Asset Reconstruction Companies

     The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 has come into force with effect from 21st June, 2002 for creation or operation of the Asset Reconstruction Companies

     ARCs are created to manage and recover Non Performing Assets acquired from the banking System

     Total outstanding assets under management with ARCs as on March 31, 2017, was

    about USD 11.58 billion

    23 ARCs in India as of 2017; 4 new players in last one year :  Ambit Flowers Asset Reconstruction Pvt Ltd  Raytheon Asset Reconstruction Pvt Ltd  Suraksha ARC  India Bulls ARC

    The top five players account for approximately 90% of total assets under management.

    Redemption (% of SRs redeemed) ratio of only 53%

    USD 3.24 billion of stressed assets were sold in Q4 FY 17  Provisioning requirement for banks investing more than 50 per cent of the value of

    stressed assets increased from April 01, 2017  Limit to be reduced to 10% on April 01, 2018

    Large investors attracted to ARCs  SSG Capital acquired stake in ACRE in 2014  KKR acquired stake in IARC in 2015  JC Flower Ambit JV in 2017

  • Investors in Distressed Assets

     Large number of investors have entered Indian market recently

     Oak Tree Capital raised USD 10 billion stressed fund and India is part of the plan

     Blackstone, Olympus, Carlyle, Pacific Alliance Group and Baring Asia targeting distress funds

     Infrastructure Leasing & Financial Services Ltd (IL&FS) has formed a joint investment platform with American private equity fund house Lone Star for stressed infrastructure projects in India. The platform would have a capital pool of USD 550 million, which could result in asset purchases of up to USD 2.5 billion

     US-based Apollo Global Management has set up an USD 825 million fund in partnership with ICICI Venture to purchase distressed assets in India

     CDPQ, the second largest pension fund in Canada, has signed a long-term partnership with Edelweiss Financial Service to invest about USD 750 million in stressed assets and specialized corporate credit in India over the next four years

     Brookfield has tied up with SBI to launch a joint venture fund to purchase distressed assets. The Canadian fund has agreed to commit USD 1 billion in the proposed fund

     Kumar Mangalam Birla controlled Aditya Birla Capital Ltd will also be delving into raising a distressed assets fund for its asset reconstruction company

     Piramal Enterprises led by Ajay Piramal announced a distressed asset investment platform of USD 1 billion in partnership with private equity fund Bain Capital Credit in 2016

     SSG Capital Management, the Asia-focused special situations investment firm is raising close to USD 2 billion across two Asia-focused new funds with focus on China, India and South-East Asia

     US buyout giant KKR & Co has become the first foreign investor to fully own an asset reconstruction company (ARC) in India and has aggressive plans to invest in distressed assets in India

    There is a potential opportunity for distressed funds to invest in distressed assets in India, i.e., invest in “overleveraged companies with good business” at discounted price. Changes in regulations has encouraged banks to lookout for options such as change in management through IBC, one time settlement (OTS) and sale of loans to ARCs at discounted value.

    Introduction of IBC has excited investors both in India and abroad who think investing in India’s distressed market could produce double-digit returns.

  • Case Study: Binani Cement Limited

     Established in the year 1997, Binani Cement has 6.25 MTPA production capacity in India and 70 MW captive power plants

     Binani Cement’s first plant was established in 1997 in Sirohi, Rajasthan. The capacity was raised to 2.25 MTPA in 2005 and it was doubled to 5.50 MTPA in 2007. In 2008, a split grinding unit was commissioned at Rajasthan raising capacity to 6.25 MTPA

     The Company has 378 million tones of limestone reserv