Canara bank-PNB with 9 other banks to be merged!

[pratikb]

adani failed in austrelia mining due to env. led issue with chinese interference .
china has big influence in austrelian mining .

Adani failed due to chinese interefering through eco activisit.

 

[abhi1984]

Actually no, the banks have limits on amount of money that they can out as loans. When loans are not recovered, they cannot give out more loans beyond the limit. They have to operate within the limit. Lets say if a bank can give out 10,000 crore in loans and 4000 crore cannot be recovered back. So, their effective limit is reduced to 6000 crore that is cycling back as long as the Rs 4000 crore non recoverable loan is on the books. So, after a while they write off the old loans as non recoverable reset the counter back to the full 10,000 crore and will be able to give 4000 crore more in loans.

Private banks will have no choice but to post it as a loss and fill that void from within their business operations. So, they cannot afford to give out loans that they cannot recover.

But in case of nationalized banks the govt recapitalizes the bank at the expense of the tax payer. This is why nationalized banks have such poor due diligence process or have all process road rolled when giving out loans to big corporate with political influence.

What are you talking about?? Can you please stop spreading half baked knowledge?

All banks have different tiers of capital - Tier 1, Tier 2 and Tier 3. Tier 1 is the common stock and disclosed reserve. Tier 2 is the debt part of the bank. Tier 3 which is rarely used is for unsubordinated debt which is normally not used. Every banks need to adhere to certain limits Tier levels of capital.

Tier 1 capital mostly remains static and grows year on year. Tier 2 capital is where the magic happens. Private banks don't use "business operations" to fill void or whatever or even give out loans. They routinely raise money from money markets via bonds and other measures. For example, HDFC Bank raised 1000 crores via masala bonds in March:
https://timesofindia.indiatimes.com...oad-via-masala-bonds/articleshow/68530085.cms

SBI, a national bank also raised money via bonds:
https://economictimes.indiatimes.co...-via-perpetual-bonds/articleshow/66756103.cms

Money which is raised is then further used to give out loans and grow capital.

Frankly, I am tired of explaining the capitalization part so, I am going to let the whole urban legend of "taxpayer money" go.

 

[Lord Nemesis]

I may have over simplified the whole thing, but that doesn't change the premise. What do you think bonds are and why do you think anybody would buy them if the bank does not have any credibility? Why would anybody trust the bank when they are asking for debt against a piece of paper? Do you think there is some security involved rather than some empty words on paper? Where does that security come from? When govt talks of recapitalizing the banks, where exactly does the govt get the money for recapitalization and how do the banks use it? Why is the banks inability to infuse money into the markets linked to need to recapitalization? Also note the difference between tax money and tax payers money. Tax payers money is much more than just tax money.

 

[abhi1984]

I may have over simplified the whole thing, but that doesn't change the premise. What do you think bonds are and why do you think anybody would buy them if the bank does not have any credibility? Why would anybody trust the bank when they are asking for debt against a piece of paper? Do you think there is some security involved rather than some empty words on paper? Where does that security come from? When govt talks of recapitalizing the banks, where exactly does the govt get the money for recapitalization and how do the banks use it? Why is the banks inability to infuse money into the markets linked to need to recapitalization? Also note the difference between tax money and tax payers money. Tax payers money is much more than just tax money.

Wow, that is a massive goal post change.

Here's a recap:

The original premise was that recapitilization means debt needs to be written off.

I countered that adding money to the bank it doesn't mean they need to write off bad loans. They just get money to keep afloat in business.

You come around flinging your half bake theories trying to assert that they need to write off loans to get "reset the counter".

I counter it with the fact that banks have different capital structures. The insinuation clarifies my statement again - banks can and do raise money without needing to write off debt.

And you still say your half bake theory "doesn't change the premise"?

What you did here was instead move the goalpost to bonds, security (god knows what that is), government recapitlization using tax money. So, no you half bake theory was demolished and stands demolish. If you want to talk/understand the changed goalpost theories, I can do that but as I said I am sick of people trying to sound like an expert when all they did was read some newspaper and parroting a view.

 

[Lord Nemesis]

I am also tried of arguing with idiots who read and repeat stuff without understanding what it means. So I ask you again

1. Where does the money for recapitalization by govt's come from?
2. Why does the bank need it if all their capital is good and not affected by the loans they give out?
3. Where does the money go directly or indirectly?

In case it wasn't clear enough, the premise is that banks need the money because they cannot dole out fresh loans without being infused with fresh capital. No one would buy the bonds of a bank that is already bankrupt and has no capacity to return the loan they are getting against bonds. The old debts will ultimately have to be written off or moved out from the books in some manner or the other so that fresh loans can be given. Why do you think banks negotiate with the loan defaulters at all to even recover a fraction of a loan and close it instead of keeping it on the books indefinitely waiting to recover it in full?

Also in case, you don't understand, the money given by govt to banks comes from tax payers. The money that banks get in exchange for bonds also comes from the tax paying citizens of the country. For example, when people invest their savings in say a debt mutual fund or some other debt instrument, they in turn buy bonds against that and usually with some security to ensure that they can recover it back in some manner. The banks in turn use that money to give loans to the market.

 

[abhi1984]

I am also tried of arguing with idiots who read and repeat stuff without understanding what it means. So I ask you again

1. Where does the money for recapitalization by govt's come from?
2. Why does the bank need it if all their capital is good and not affected by the loans they give out?
3. Where does the money go directly or indirectly?

In case it wasn't clear enough, the premise is that banks need the money because they cannot dole out fresh loans without being infused with fresh capital. No one would buy the bonds of a bank that is already bankrupt and has no capacity to return the loan they are getting against bonds. The old debts will ultimately have to be written off or moved out from the books in some manner or the other so that fresh loans can be given. Why do you think banks negotiate with the loan defaulters at all to even recover a fraction of a loan and close it instead of keeping it on the books indefinitely waiting to recover it in full?

Also in case, you don't understand, the money given by govt to banks comes from tax payers. The money that banks get in exchange for bonds also comes from the tax paying citizens of the country. For example, when people invest their savings in say a debt mutual fund or some other debt instrument, they in turn buy bonds against that and usually with some security to ensure that they can recover it back in some manner. The banks in turn use that money to give loans to the market.

If you can't clarify your thoughts, call someone stupid. Real mature! I never engage you on this forum because I know you are a half asser who likes to write wall posts for fun.

 

[Lord Nemesis]

I didn't call you an idiot. I said I am tired of arguing with idiots who just read and repeat stuff without understanding what it means. It was a choice that was up to you. I simply asked you a few questions that will help you follow why the capital is required and where it goes and how its connected to the debt. But I think it is clear who the half asser is given that you wrote something in reply, but didn't even bother to answer the questions and ignored the rest.

You apparently think that none of these are connected because you ignore the indirect dependencies between the tiers of capital and the necessity to maintain the ratio at a healthy level in order to be able to give out fresh debt. You think that govt injecting more capital has nothing to with the bad debt situation.

https://www.indianeconomy.net/splclassroom/what-is-recapitalisation-of-public-sector-banks/

Recapitalisation was necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts. Similarly, they need funds to meet the higher capital requirements under Basel III norms. Altogether, there are following three sound reasons for recapitalization of PSBs.

1. Rising volume of bad assets has led to erosion of capital.
2. The Basel III capital norms requires higher capital in banks.
3. Expanding credit needs in the economy can be made only with higher capital.

The compelling need for large scale recapitalization is the first factor ie., rising volume of bad debts. Higher NPAs and very low asset quality including the problem of loss asset requires replacing such funds by using money from the capital base. As per the 2017-18 trend, PSBs account for nearly 90 per cent of Gross Non-Performing Assets (GNPAs) of the entire banking sector.

Note point 1 & 3 in particular. Banks have bad loans and are in no position to afford to put more credit out in the market. Banks cannot just sit on their asses with bad debt and and think that their bonds will be bought up without thinking how it will be recovered back. Basically this is an attempt to clean the books and banks are not going to keep that bad debts in the books for eternity. Its going to be written off completely or after negotiation in return for peanuts.

Also, all money that goes into this is ultimately linked to the tax paying citizens of this country whether its govt using our taxes in one form or the other or whether they are indirectly using our post tax investments and savings.

I don't have to be an expert in economics to understand what's really happening under the hood. The bottom line at the end of the day is that PSU banks continue doling out bad loans without following due diligence procedures properly and the govt has to recapitalize them so that they get back into a healthy position in order to be able to give out more debt which may or may not be recovered back.

I am also not against the concept of recapitalization, but it only makes sense when mistakes made earlier are not allowed to be repeated again, otherwise its just a cycle of destruction at the expense of tax paying citizens.

 

[abhi1984]

I didn't call you an idiot. I said I am tired of arguing with idiots who just read and repeat stuff without understanding what it means. It was a choice that was up to you. I simply asked you a few questions that will help you follow why the capital is required and where it goes and how its connected to the debt. But I think it is clear who the half asser is given that you wrote something in reply, but didn't even bother to answer the questions and ignored the rest.

You apparently think that none of these are connected because you ignore the indirect dependencies between the tiers of capital and the necessity to maintain the ratio at a healthy level in order to be able to give out fresh debt. You think that govt injecting more capital has nothing to with the bad debt situation.

https://www.indianeconomy.net/splclassroom/what-is-recapitalisation-of-public-sector-banks/

Recapitalisation was necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts. Similarly, they need funds to meet the higher capital requirements under Basel III norms. Altogether, there are following three sound reasons for recapitalization of PSBs.

1. Rising volume of bad assets has led to erosion of capital.
2. The Basel III capital norms requires higher capital in banks.
3. Expanding credit needs in the economy can be made only with higher capital.

The compelling need for large scale recapitalization is the first factor ie., rising volume of bad debts. Higher NPAs and very low asset quality including the problem of loss asset requires replacing such funds by using money from the capital base. As per the 2017-18 trend, PSBs account for nearly 90 per cent of Gross Non-Performing Assets (GNPAs) of the entire banking sector.

Note point 1 & 3 in particular. Banks have bad loans and are in no position to afford to put more credit out in the market. Banks cannot just sit on their asses with bad debt and and think that their bonds will be bought up without thinking how it will be recovered back. Basically this is an attempt to clean the books and banks are not going to keep that bad debts in the books for eternity. Its going to be written off completely or after negotiation in return for peanuts.

Also, all money that goes into this is ultimately linked to the tax paying citizens of this country whether its govt using our taxes in one form or the other or whether they are indirectly using our post tax investments and savings.

I don't have to be an expert in economics to understand what's really happening under the hood. The bottom line at the end of the day is that PSU banks continue doling out bad loans without following due diligence procedures properly and the govt has to recapitalize them so that they get back into a healthy position in order to be able to give out more debt which may or may not be recovered back.

I am also not against the concept of recapitalization, but it only makes sense when mistakes made earlier are not allowed to be repeated again, otherwise its just a cycle of destruction at the expense of tax paying citizens.

The reason I called you a half asser is because you abandoned your initial half ass statement under the guise of "simplicity" and now trying to change the topic to "why do banks need money?". You may call me stupid but that is what you call a half ass attempt at explaining a situation. There is no gotcha in the fact that banks need money because of bad loans or government infusion is required because no one will buy these banks debts or even that banks might be tempted to write down loans to minimum possible value.

But if you sincerely want to discuss this then allow me to write a rather long wall of text.

There are multiple aspects to this:
First, loans themselves. A loan is considered bad after 90 days has passed, then levels increase with each 90 days. At 270 days it is completely gone. Now what happens is banks (private and public both) are smart to this definition so they frequently re-negotiate rates with borrowers at a long timeframe. This way they can show a loan to be good even though it is bad. Now, private banks are no saints as they do this frequently. I wouldn't be surprised if they turned out bad too.

If the payment doesn't happen even after re-negotiation then banks are in a soup because the renegotiated principal is often the principal + interest at the time. So, the original loan becomes even bigger in this case.

At this point the banks are in trouble because there is no way to recover full value. They need to negotiate and "write down" the loans to net realizable value. And it is not a "write off" which means wiping the debt off completely. Writing off is an extreme case - this happens in something like say farmer loan waiver where the loans are essentially written off because the net realizable value is 0. Agriculture and allied products are something private banks runway from like a plague.

The problem crops is how do banks get even the net value of their loans. And this brings us to the 2nd aspect.

Second, bankruptcy and collection procedures. For a long time the recovery process had to go through a special court attached to High Courts. This meant that the process of recovery was de-linked from the company process. With the passing of Indian Bankruptcy Code the proceedings have become easier. The law is new so everyone is trying to test the limits so it will take some time before we have a smoother process.

One thing of note here is that the law was passed during NDA 1. So there are tons of people who try to underplay this laws long term effect saying "recap is good but only if banks are not allowed to make same mistakes". As King Solomon says in Ecclesiastes "What has been will be again, what has been done will be done again; there is nothing new under the sun." ie. mistakes will happen. The only thing which should happen in the future is that we have a functioning secondary market which can allow banks to get their bad debts in order fairly quickly.

Third, the outcry on "taxpayers money". If we follow this logic then government being majority owners of psu banks = tax payer owning these banks. Now, bank loans have already gone bad and PSUs are looking at 40-50% haircuts (write downs) i.e. tax payers are looking at 40-50% loss. The two options in front of tax payers then is don't give the money and sell off loans taking heavier losses, layoff people or give the banks money to keep it running. There is no winning hand here. The only question is how badly people want this to end.

Fourth, where does the money go. Nothing comes for free even if it comes from the government. If the capital infusion happens at Tier 2 level then it is essentially a bond and banks need to pay back that money. You might want to jump in here and claim that government will give it at lower rates/not get the money back etc etc.

But here's the thing government has better economic sense than many nincompoops churning out editorials. The capital infusion is more likely going to happen at Tier 1 level i.e. government will end up owning more of the banks. The end game being - once the banks stabilize and bank stocks start to rise again they will sell of their stocks under disinvestment scheme. The problem crops up if there is a socialist or UPA government at the center because they are notorious for not meeting disinvestment target.

 

[blr_p]

This is difficult to do mate. A loan may not turn bad for years. I am looking to start a business and hence am looking for a loan. I know I can succeed in my venture, but there is no guarantee of that. No private bank will give me a loan because their risk assessment is very strict. However, that doesn't mean that chances of me turning NPA are high. They are not, but private banks usually only deal with sure-shot loans, like home and car loans to salaried people who they know have the least chance of defaulting.
If public banks were to start doing the same, all development and growth will be stifled. Only the govt will be able to do anything substantial and all of us will be mere employees.
The rules need to be strict for people who are repeated offenders. Before the Kingfisher debacle, Mallya was one of our leading businessman. What the banks don't do properly and has to be improved upon, is actually doing the follow-ups after a loan properly. Making sure the money is being utilized for what it's given for and repeatedly doing independent audits of the company's health, so that the bad loans don't baloon to such high numbers. Until and unless, a prospective businessman is completely fraud there is no guarantee that a loan might not turn into an NPA.

A point to add here is the cost of getting credit has to come down. This is a fight the finance ministry has being having with the RBI. Always.

How to do it in a way that does not increase inflation. Without dipping into foreign reserves.

Getting credit is better than no credit but that credit has to be at a sustainable rate. For both, borrower and on the macro level.

 

[blr_p]

This is difficult to do mate. A loan may not turn bad for years. I am looking to start a business and hence am looking for a loan. I know I can succeed in my venture, but there is no guarantee of that. No private bank will give me a loan because their risk assessment is very strict. However, that doesn't mean that chances of me turning NPA are high. They are not, but private banks usually only deal with sure-shot loans, like home and car loans to salaried people who they know have the least chance of defaulting.
If public banks were to start doing the same, all development and growth will be stifled. Only the govt will be able to do anything substantial and all of us will be mere employees.
The rules need to be strict for people who are repeated offenders. Before the Kingfisher debacle, Mallya was one of our leading businessman. What the banks don't do properly and has to be improved upon, is actually doing the follow-ups after a loan properly. Making sure the money is being utilized for what it's given for and repeatedly doing independent audits of the company's health, so that the bad loans don't baloon to such high numbers. Until and unless, a prospective businessman is completely fraud there is no guarantee that a loan might not turn into an NPA.

So loans were easier to get back then and this led to bad debt for the bank.

What about now when banks are more nervous to lend because of that bad debt ?

RBI can keep cutting the repo rate but are banks willing to take on more risk.

 

[rdst_1]

Issue is not whether there is risk or not. Of course there is an inherent risk in every loan. But the bank has systems in place to limit the risks.
First risk is what if the person who has taken a loan dies. For that, banks ask the person taking the loan to take a life insurance for the loan. This is actually something everyone should follow. You should have at least as much life cover aa your debts. Of course you can have more, but at the very least it should cover your debts.
Second thing is collateral. Banks have always been asking for collateral as that helps in reducing the bank's risk. The only issue till now was that insolvency proceedings used to take a very long time which has now been sorted with IBC.

The main issue is corruption or political influence. The bank has a system in place to release the funds. If I am buying a machine, the bank will transfer money directly to the person who is selling me the machine. This ensures that the money is not being used for other purpose than those intended. Sometimes even the machines will have to be stamped with hypothecation of bank so that no one can sell them off easily. Then there are scheduled checks that bank officials have to routinely do of the plant and check whether the machinery is still present and working and being used. Also regular audits of the production and sales have to be conducted by the bank before releasing later installments of the loan. This was the aspect that is mostly abused and misused by both industrialists and bankers. Nowadays, banks have become a lot stricter and even started holding their officers accountable for not doing their job properly. But there will still be issues because of crony capitalism when the higher rank officers either collude or give in to political pressures.

 

[6pack]

My understanding is this.

Loans will still be easier to get if you have political connections. But instead of the bank failing (if it was small like before and taking away people's money) they have merged all the tiny banks into one big bank so it won't fail or cannot fail (too big to fail and cause hardship to common folks). Such a big bank will always be getting funds from the govt even if they have lot of npa assets.