Chasing Bank NPAs
How the RBI has taken two important steps to rescue the banks…
In the last couple of months, the RBI has initiated two very important measures that will go a long way in alleviating the problem of NPAs in the banking system. At over $110 billion of NPAs and nearly $180 billion of stressed assets, this was a massive problem. In fact, the entire bank credit by the PSU banks has stagnated due this mountain of NPAs. So how exactly is the RBI tackling this problem?
Prompt Corrective Action (PCA)…
Prompt corrective action is a initiative that the RBI will drive specifically for banks where the financials are seriously imperiled. Here are some criteria under the PCA. A bank will be referred to the PCA if its net NPAs cross a certain threshold level or if the Return on Assets is negative for two years in succession. For example, the RBI first initiated PCA in case of IDBI Bank and then followed it up by initiating PCA for Central Bank of India. In both the cases the net NPAs were in excess of 10% and the ROA was negative for 2 years in succession.
Initiating PCA will mean the RBI regulates most of the activities of the bank from credit monitoring, credit assessment and investments. RBI will also place restrictions on staffing, senior management compensation and branch expansion plans. The idea is to enforce a high level of discipline so that weak banks have a chance of bouncing back.
Referring to IBC…
This is, perhaps, the most aggressive stand taken by the RBI with respect to addressing the NPAs in the banking system. While PCA attacks the NPA problem from the perspective of the bank, the IBC attacks the NPA problem from the perspective of the defaulting clients. The RBI has identified 12 such defaulting companies where the bank exposure exceeds Rs.5000 crore and where more than 60% of the loans have become NPAs. Companies identified in the first round include names like Bhushan Steel, Bhushan Power,
Alok Textiles, Amtek Auto, Electrosteel Castings, Essar Steel. The lending banks will be given 180 days time to come up with a resolution to the loan problem, which may be subsequently extended up to a maximum of 270 days. On the completion of the 270 days, the RBI will automatically initiate proceedings against the defaulting company under the Insolvency and Bankruptcy Code (IBC). This will entail either a complete sale of the company, stripped sale or a large haircut.
The PCA and the IBC are major initiatives from the RBI. Of course, there are still question marks over the legal implications and the implementation of these measures. But, to the credit of the RBI, a major step has been taken. If the RBI makes headway, then we may hope to see the beginning of the end of the NPA problem of Indian PSU banks!
Big Trade Question
Are we letting the INR ruin our trade equations?
The trade data for the month of May 2017 has raised some serious question. While the exports are up 8.32% on a YOY basis, the imports are up by 33% during the same period. As a result, the trade deficit has settled at around the level of $13 billion per month and at this run it will imply a 60% higher trade deficit in the fiscal year 2017-18.
Imports on the rise…
The 33.2% rise in imports was driven by oil and gold. Oil imports for the month were up by nearly 29%. Only 7% was explained by rise in oil prices with the balance being due to rising volume of imports. The bigger worry is that of gold imports, which is up by 236% for the month of May. The refrain is that the sharp spurt in demand was due to the festival season, but the fact remains that the RBI has been expending precious dollar reserves to import an unproductive commodity.
Exports are tepid…
Exports have been tepid with respect to goods and services. While the traditional export sectors like textiles, gems & jewelry, engineering goods and marine products have been growing at around the mean growth, the real thrust anticipated from the “Make in India” campaign is still not visible. As a result, the trade deficit is widening and services are not able to compensate for the sharp rise in merchandise trade deficit.
Commodity Options
The biggest challenge will be liquidity and asymmetry…
The SEBI took a major step this week by announcing the regulatory and operational framework for commodity options. The largest commodity bourse by volumes, MCX, has already indicated that it will be ready to launch commodity options in the next 3-4 months. Before we get into the challenges, here are some of the key features of commodity options…
Commodity options: Key features…
- Commodity options will be allowed for 1 commodity per exchange to begin with and later extended.
- For a commodity to quality for options, it will have to be among the top-5 most traded futures
- Additionally, agri products will need minimum daily turnover of Rs.200 core and non-agri Rs.1000 crore
- Commodity options can be either reversed, as in case of equity options, or exercised on expiry
- Commodity options will have an expiry a couple of days earlier than commodity futures
- All commodity options exercised will devolve into commodity futures on the day of expiry
- The strike price of the commodity option will become the theoretical futures price for devolvement
- Long calls and short puts will devolve into long futures while long puts and short calls will devolve into short futures. Normal margining will apply from that day onwards.
