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Banking industry in IndiaBanking 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

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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 SharePercent 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 PCASeptember 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& InsolvencyAdjudicator

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

Firms

InsolvencyRegulator

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

InsolvencyResolutionProfessionals

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

InsolvencyResolutionProcess

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

LiquidationProcess

o Application on Defaulto IP may act as a Liquidatoro Formation of a Liquidation Trusto Invite claims from creditorso Dissolution of the Corporate Debtoro Dues of secured creditors & workmen shall have priority overo 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 reserves that can cater to the requirements for the next 30 years

After establishing its footprint firmly in India, Binani Cement Limited has expanded its manufacturing operations to Dubai and China

It had plans to set up 2 MTPA grinding unit in China, 2 MTPA clinkering unit in UAE, 1 MTPA grinding unit in Tanzania, 1.3 MTPA brown field and 3.5 MTPA Greenfield units in India before it became an NPA with Banks

Aggregate debt of USD 600 million and CG of USD 374 million as on date

Edelweiss ARC, which has been able to acquire 69 per cent of the company’s debt from 14 banks between 2015 – 2016; Extended USD 15.4 million interim finance

Company referred to NCLT in July 2017 by Bank of Baroda

Bidders include Dalmia Bharat – Bain Consortium , Ultra Tech Cement ( Aditya Birla Group), Rakesh Jhunjhunwala, Heidelberg Cement, JSW Group and Ramco Cement

Highest bidder Dalmia Bharat – Bain Consortium to pay USD 973 million to lenders and infuse additional USD 62 million

Unsecured lenders to get cash or equity in lieu of dues

Case Study:Jalan Intercontinental Hotels Private Limited

Aditya Jalan-promoted Jalan Intercontinental Hotels Pvt Ltd was set up in 2013 with an investment of USD 23.1 million in 2013

The property developed on 1.92 acre of land parcel (leased for 99 years) and operates under management operator contract with Taj Gateway brand

Promoters had plans to set up 197 rooms but only 80 are functional

The company owes lenders USD 13.9 million

The account was acquired by the ARC at 20:80 basis – 20% upfront cash and 80% through Security Receipts

Promoters had been trying to sell the hotel for USD 30.9 million in 2015

Edelweiss has received bids over USD 19.3 million

Track Record in IBC

Banks can sell NPA portfolios to ARCS, Banks, NBFCs and Financial Institutions.

2434 fresh cases filed till Nov 2017; 2304 cases of winding up transferred from various Courts

2750 cases disposed off while 1988 cases are pending as of November 30, 2017

The High Court and The Supreme Court of India playing active role in establishing supremacy of Insolvency & Bankruptcy Code over other regulations

10 resolution plans approved till Dec 2017

34 liquidation orders passed till Dec 2017

LARGE CASES REFERRED IN FIRST ROUND

Essar Steel, Lanco Infratech, Bhushan Steel, Bhushan Power, Alok Industries, Monnet Ispat,Era Infra Engg, ABG Shipyard, Jaypee Infratech, Electrosteel , Amtek Auto, Jyoti Structures

LARGE CASES REFERRED IN SECOND ROUND

Videocon , Visa Steel, JSPL, IVRCL, SEL Manufacturing, Orchid Pharma, Monnet Power, BILT Graphics Paper Products,Uttam Galva Steel , Coastal Projects Limited, Essar Projects

Sale of NPA Portfolios

Feb 2018 – Bank of India has invited bids for NPA portfolio of USD 334 millionThe public lender has invited ARCS, banks, NBFCs and FIs to bids for these assets

Nov 2017 – Allahabad Bank invited bids for sale of 61 NPAs worth USD 193 million in Nov 2017. Bank has invited ARCS, banks, NBFCs and FIs to bids for these assets

Nov 2017 – Chennai-based Indian Bank invited proposals from ARCs, Banks, NBFC and FI for sale of NPA portfolio of USD 170 million

October 2017 – State Bank of India auctioned 24 accounts worth USD 540 million

June 2017 – Andhra Bank put USD 598 million NPA assets for sale

March 2017 – IDFC Bank sold assets worth USD 772 million to Edelweiss under SR model

April 2016 – Standard Chartered sold USD 1 billion distress portfolio in India. Target investors included CPPIB (Canada Pension Plan Investment Board), KKR India and SSG Capital Management Ltd.