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Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of microfinance and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, <keyword id="46717" type="General" weightage="20" keywordseo="IndusInd-bank" source="Orion">IndusInd Bank</keyword> set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e., an <keyword id="79363" type="General" weightage="20" keywordseo="npa" source="Orion">NPA</keyword>, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals, i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, <keyword id="30067" type="General" weightage="20" keywordseo="RBI" source="Orion">RBI</keyword>, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv, from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending installments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honor any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its <keyword id="763994" type="General" weightage="20" keywordseo="Gross-NPA" source="Orion">gross NPA</keyword> for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. <keyword id="62152" type="General" weightage="20" keywordseo="IDFC-bank" source="Orion">IDFC Bank</keyword>’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in unsecured loans, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. Kotak Mahindra Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical Bollywood headmaster who runs his dominion with an iron fist and takes things (and ceiling rates) into their own hands. However, that's a story for another day.

Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

New Delhi: Shares of Federal Bank on Tuesday jumped 8 per cent after the firm posted an 11 per cent increase in net profit to Rs 1,057 crore in the September quarter. The stock climbed 8 per cent to Rs 199.55 on the BSE. At the NSE, it soared 7.83 per cent to Rs 199.49. The lender had earned a net profit of Rs 954 crore in the year-ago period. The total income increased to Rs 7,541 crore during the quarter under review against Rs 6,186 crore in the same quarter last year, Federal Bank said in a regulatory filing on Monday. The bank reported an interest income of Rs 6,577 crore during the quarter, higher than Rs 5,455 crore in the same period a year earlier. Net interest income (NII) grew 15 per cent to Rs 2,367 crore, as compared to Rs 2,056 crore in the same quarter a year ago. As regards asset quality, the bank witnessed an improvement with gross non-performing assets (NPAs) declining to 2.09 per cent of the gross loans by the end of September 2024, from 2.26 per cent a year ago. Similarly, net NPAs, or bad loans, moderated to 0.57 per cent from 0.64 per cent at the end of the second quarter of the previous fiscal year.

Federal Bank shares surge 8 percent after September quarter earnings announcement

<ul><li>Incremental credit growth expected to remain robust at Rs. 16.5-18.0 trillion in FY2024, despite marginal slowdown.</li><li>NIMs expected to compress by 20-25 bps, though benign credit costs and lower operating expenses to provide support.</li><li>Asset quality is likely to remain benign as GNPAs and NNPAs are expected to decline further by March 2024.</li></ul> Analysts may be worried about rising stress in the retail assets of banks, but <keyword id="6354972" type="General" weightage="100" keywordseo="icra" source="Orion">ICRA</keyword> is of the view that the sector is resilient and that credit growth is expected to remain strong. Given that deposits have been repriced after the <keyword id="6375120" type="General" weightage="50" keywordseo="monetary-policy-committee" source="Orion">Monetary Policy Committee</keyword> of the <keyword id="6354335" type="General" weightage="50" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword> delivered six interest rates hikes. However, ICRA does not expect this to impact profitability of the sector negatively. In a note, the agency said: “While the upward repricing of the deposit base is likely to lead to a moderation in the interest margin, benign asset quality pressures would support lower credit costs and earnings.” Accordingly, in ICRA’s view, the banking sector is expected to continue generating sufficient internal capital to largely meet its growth needs while improving the capital cushions. The retail segment is likely to remain the key contributor to credit growth although the sustainability of asset quality hinges on macroeconomic conditions remaining favourable. ICRA expects the headline metrics of the banking sector to remain on an improving trajectory on the back of controlled net additions (net of recoveries and upgrades) to non-performing advances (NPAs) and reasonably strong credit growth. Accordingly, ICRA expects the gross NPAs (GNPAs) and net NPAs (NNPAs) to decline to 2.8-3.0% and 0.8-0.9%, respectively, by March 2024 from 3.96% and 0.97%, respectively, as on March 31, 2023, which would remain the best in more than a decade. Notwithstanding this, ICRA remains cautious about the impact of macroeconomic shocks on asset quality, if these were to materialise. Commenting further Anil Gupta, Senior Vice President &amp; Co-Group Head, ICRA said: “Credit growth remains robust despite some moderation. Even at the anticipated pace of growth for FY2024, incremental credit expansion would be the second highest ever at Rs 16.5-18.0 trillion, next only to the record level of Rs 18.2 trillion (+15.4%) last year.” Credit costs are estimated to remain at 1.0% of advances in FY2024, in line with FY2023. This should allow banks to comfortably withstand a compression of 20-25 bps in the interest margins, which would lead to a mild moderation in the return on assets (RoA) to 1.0% in FY2024 from 1.1% in FY2023. At these levels, the RoE would remain healthy at 13.0-13.1% in FY2024 against 13.8% in FY2023. Furthermore, supported by internal capital generation and lower <keyword id="4105639" type="General" weightage="20" keywordseo="NNPA" source="Orion">NNPA</keyword> levels, the capitalisation and solvency profiles of private and public sector banks would remain comfortable. ICRA projects the Tier-I capital of the banking sector at 14.6-14.7% (14.4% as of March 2023) and an improvement in the solvency levels to 7% (8% as of March 2023) by March 2024. Over the last decade, credit growth in the retail segment remained buoyant and a key driver of overall credit expansion. As retail growth outpaced other segments, its share in bank credit rose to 32% as on March 31, 2023 from 18% in March 2013. Moreover, the corporate book witnessed underperformance in recent years, including weaker asset quality levels and muted expansion, resulting in slower growth trends relative to the retail segment. The Covid-19 pandemic was a stress test event on the asset quality across segments and defaults and losses were relatively higher in the unsecured segments. With more insight on the borrowers’ repayment behaviour during the pandemic, lenders can take better decisions while growing unsecured retail loans. Moreover, the retail segment continued to report resilience despite volatile macro-economic conditions, including rising interest rates and surging inflation, which impacted disposable income. Gupta added: “Even as the retail segment has performed well, the material weakening of macro-economic conditions could exert pressure on the debt-servicing abilities of borrowers and we remain watchful of its impact on the asset quality of lenders. Nonetheless, banks have strong operating profits and capital positions. Consequently, they are much better placed at present for navigating through such a scenario.”

Interest rate hikes unlikely to have negative impact on earnings of banking sector: ICRA

<ul><li>Farm incomes grew between 1.3-1.7 times in FY22, non-farm income grew between 1.4-1.8 times, according to a <keyword id="3209999" type="General" weightage="20" keywordseo="SBI-report" source="Orion">SBI report</keyword>.</li><li>SHGs are entities, which usually have a membership of 15 to 20 members from very low income families, usually women.</li><li>A total of eight lakh fresh SHGs were financed in FY22 – with Bihar taking the biggest share.</li></ul>Self-help groups (SHGs) are not just providing economic independence to rural women, but also contributing heavily to the growing non-farm incomes across the country. While farm incomes grew between 1.3-1.7 times in FY22, non-farm income grew between 1.4-1.8 times, according to a Special Report on Agriculture by SBI. Rural women and their cottage industries, allied agricultural businesses and petty trade help generate large-scale employment for rural Indians who engage in the seasonal trade of agriculture. “SHGs, crucial in imbibing an entrepreneurial spirit among farmers at the lower band of the spectrum, in particular women, have a high concentration in select states and within those states also they remain confined to certain districts though their performance in aspirational districts of NITI Aayog has been noticeable of late,” says a Special Report on Agriculture by SBI. SHGs are entities, which usually have a membership of 15 to 20 members from very low income families, usually women. They mobilise savings from members and use the pooled funds to give loans to the needy members. <cmsannotation type="cmsannotation" annotationid="Andhra, Telangana rank higher" comment="subhead" text="Andhra, Telangana rank higher">Andhra, Telangana rank higher</cmsannotation> A total of eight lakh fresh <keyword id="6501158" type="General" weightage="80" keywordseo="shg" source="Orion">SHG</keyword>s were financed in FY22 – with Bihar taking the biggest share. Amaravati and Telangana districts together account for a majority of SHG finance. Of the total SHG financing in the country, 18% outstanding belongs to the 124 aspirational districts. Launched in January 2018, the Aspirational Districts programme aims to quickly and effectively transform 112 most under-developed districts across the country. “Aspirational districts programme…has been a ‘huge success’ in just a period of four years at least in respect of SHG financing,” says the SBI report. This concentration, however, is very high in states like Karnataka, where the top five districts accounted for 83% of total SHG financing of the State. Similarly, the top five districts in <keyword id="37102" type="General" weightage="50" keywordseo="andhra-pradesh" source="Orion">Andhra Pradesh</keyword> and <keyword id="20154" type="General" weightage="50" keywordseo="tamil-nadu" source="Orion">Tamil Nadu</keyword> accounted for more than 50% share — all indicating that while a change is afoot, it’s not evenly distributed across the regions of this vast country. <cmsannotation type="cmsannotation" annotationid="UP, Haryana and Punjab have the worst credit quality" comment="subhead" text="UP, Haryana and Punjab have the worst credit quality">UP, Haryana and Punjab have the worst credit quality</cmsannotation> In terms of credit quality, <keyword id="6357713" type="General" weightage="50" keywordseo="uttar-pradesh" source="Orion">Uttar Pradesh</keyword>, Haryana and Punjab rank the lowest — with a high non-performing assets ratio (<keyword id="79363" type="General" weightage="80" keywordseo="npa" source="Orion">NPA</keyword>) of over 25%, according to SBI’s Special Report on Agriculture. <div type="image" title="NPA Ratio" msid="93036535" hostid="261" sizebytes="77358"></div> Arunachal Pradesh and Tripura, with an <keyword id="1039815" type="General" weightage="20" keywordseo="NPA-Ratio" source="Orion">NPA ratio</keyword> of 19 and 18 respectively, are also part of the list of worst NPA states. Andhra Pradesh, however, is the best performing state with an NPA ratio of 0.8. NPA ratio is calculated by dividing non performing assets by total loans given. SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/entertainment/news/top-10-most-watched-hindi-web-series-on-ott-platform-as-per-omax-report/slidelist/93032569.cms">Top 10 most watched Hindi web originals in the first half of 2022</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/startups/news/edtech-startup-creative-galileo-raises-7-5-million-in-series-a-funding/articleshow/93029916.cms">Edtech startup Creative Galileo raises $7.5 million in Series A funding</a>

Bihar self-help groups raise the most loans but Andhra tops in loan quality

<ul><li>The <keyword id="6354977" type="ORGANIZATION" weightage="20" keywordseo="Supreme-Court">Supreme Court</keyword> has rejected an order from the <keyword id="30067" type="ORGANIZATION" weightage="20" keywordseo="RBI">RBI</keyword> which gives banks a 180-day period for the resolution of <keyword id="142154" type="PERSON" weightage="20" keywordseo="bad-loans">bad loans</keyword>. As a result, around 75 large borrowers will also be let off the hook. </li><li>If the verdict had gone against them, then banks would have had to provision assets against ₹2.4 trillion worth of bad loans. </li><li>The rationale behind the RBI’s February 12th circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately.</li></ul> The Supreme Court has rejected an order from the RBI which gives banks a 180-day period for the resolution of bad loans. As a result, around 75 large borrowers will also be let off the hook. With the verdict, India’s banks won’t have to categorise around <a href="https://www.livemint.com/industry/banking/banks-risk-adding-25-billion-in-power-sector-npas-on-supreme-court-decision-1551845161043.html">₹1.8 trillion</a> worth of loans to 34 coal-based thermal power plants as “non-performing”. The relief also extends to <a href="https://economictimes.indiatimes.com/industry/energy/power/75-firms-have-debt-of-rs-2-24-lakh-cr-petitioners/articleshow/68658771.cms">₹840 billion</a> worth of loans to companies in other sectors such as sugar, shipping and infrastructure. If the verdict had gone against them, then banks would have had to provision assets against these loans. The verdict comes more than a year after the RBI released <a href="https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11218">a circular </a>on February 12th, 2018 that mandated banks to recognise loans of at least ₹50 million as having gone bad even in the event of a one-day default. Further still, the circular gave them not more than 180 days to approach a <keyword id="43550" type="EVENT" weightage="20" keywordseo="Bankruptcy">bankruptcy</keyword> tribunal for the resolution of said loan if the exposure was more than ₹20 billion. The rationale behind the circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately. It did lead to a dramatic reduction in defaults, as loans were borrowers did not pay installments on time fell by <a href="https://www.livemint.com/Industry/4qEIqln9QsZYsMBsQPLtlK/Large-borrowers-fall-in-line-after-RBI-one-day-default-norm.html">60% to ₹551 billion</a> between June and September 2018. However, the order ran into an obstacle as power firms, along with shipping companies and sugar and textile producers, <a href="https://www.livemint.com/Industry/C8sPT0Q75jFg0ZXfHdzJ4H/Supreme-Court-provides-interim-relief-to-stressed-power-firm.html">contested the one-day default norm </a>and 180-day resolution period. The companies in the aforementioned sectors were eventually <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/rbis-deadline-for-bankrupt-cos-supreme-court-stays-insolvency-proceedings-against-defaulters/articleshow/65776630.cms">granted interim relief </a>in September 2018 pending a full hearing. The interim relief was aimed at helping banks restructure and offload their loans to struggling companies. Throughout the past year, the RBI had <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/how-rbis-feb-12-circular-changed-the-way-banks-dealt-with-stressed-assets/articleshow/67920150.cms">refused to dilute the circular</a>, maintaining its necessity in cleaning up the banking sector. SEE ALSO: <a href="https://www.businessinsider.in/indias-central-bank-just-gave-the-countrys-small-businesses-a-one-time-breather-from-some-of-their-bad-loans-but-with-a-few-conditions/articleshow/67346902.cms">India’s central bank just gave the country’s small businesses a one-time breather from some of their bad loans — but with a few conditions</a> <a href="https://www.businessinsider.in/miscellaneous/10-landmark-judgements-indias-supreme-court-passed-in-2018/slidelist/67254190.cms">10 landmark judgments India’s Supreme Court passed in 2018</a>

India's Supreme Court order against the RBI will be a huge relief for 75 borrowers with loans worth over ₹2.4 trillion

<ul><li>On Feb 7th, the <keyword id="6355809" type="UNKNOWN" weightage="20" keywordseo="nclt">NCLT</keyword> ordered a forensic <keyword id="6354677" type="DEFINITION" weightage="20" keywordseo="Audit">audit</keyword> against <keyword id="139545" type="COMPANY" weightage="20" keywordseo="Viceroy-Hotels">Viceroy Hotels</keyword>, the owner of two <keyword id="1880913" type="COMPANY" weightage="20" keywordseo="JW-Marriott-Hotels">JW Marriott hotels</keyword> in Hyderabad. </li><li>In doing so, the NCLT established a significant precedent for future cases: a 51% vote by a company’s Committee of Creditors is enough to initiate a forensic audit. </li><li> Asset Reconstruction Co (Arcil) had taken Viceroy Hotels to court over unpaid dues and wanted to initiated a forensic audit against the company.</li></ul>The Hyderabad bench of the National Company Law Tribunal (NCLT), a special body set up under the Companies Act in 2013 to oversee insolvency disputes, has <a href="https://www.business-standard.com/article/news-ians/51-vote-enough-for-forensic-audit-of-corporate-debtor-nclt-119030701147_1.html">ordered a forensic audit against Viceroy Hotels</a>, the owner of two JW Marriott hotels in Hyderabad, following pressure from Asset Reconstruction Co (India) Ltd (Arcil). In doing so, the NCLT established a significant precedent for future cases: a 51% vote by a company’s Committee of Creditors is enough to initiate a forensic audit. Arcil had taken Viceroy Hotels to court over unpaid dues of around <a href="https://www.dnaindia.com/business/report-viceroy-hotels-to-undergo-forensic-audit-as-arcil-smells-foul-play-2724838">₹5.3 billion </a>and had asked for an audit of several transactions. A forensic audit is an exhaustive review of a company’s financial accounts and fraudulent transactions and can be used as evidence in a court when prosecuting a defaulter. The NCLT specifically cited a section under the Insolvency and <keyword id="2564807" type="PERSON" weightage="20" keywordseo="Bankruptcy-Code">Bankruptcy Code</keyword> - 21(8) - which provides for a 51% approval in certain cases. The resolution professional handling the Viceroy Hotels case had originally declined the audit, explaining that a 66% approval by its creditors would be required as per Sec 28 (3) of the code, which relates to changes in the appointment or the terms of contract of auditors of the defaulting company. Only <a href="https://barandbench.com/51-required-for-initiating-forensic-audit-of-corporate-debtor-nclt/">59.2%</a> of the creditors had voted in favour. The NCLT then had to determine whether a forensic audit required a 66% vote or not. It concluded that a forensic audit did not equate to “changing the terms of auditors” and hence, didn’t require a 66% approval. By clarifying this, the NCLT’s ruling will make it a lot easier for creditors to initiate forensic audits against large loan defaulters. SEE ALSO: <a href="https://www.businessinsider.in/india-amending-ibc-to-prevent-no-show-from-winning-bidders/articleshow/68180285.cms">India is tweaking its bankruptcy law to prevent successful bidders from backing out</a> <a href="https://www.businessinsider.in/indias-finance-minister-touts-the-success-of-the-countrys-recently-implemented-bankruptcy-code-but-it-still-requires-significant-improvement/articleshow/67382165.cms">India’s finance minister touts the success of the country’s recently-implemented bankruptcy code — but it still requires significant improvement</a>

A new ruling on forensic audits just gave banks more power to corner stubborn borrowers

<ul><li>The Reserve Bank of India (<keyword id="30067" type="ORGANIZATION" weightage="20" keywordseo="RBI">RBI</keyword>) released guidelines for a restructuring scheme for the stressed accounts of micro, small and medium-sized enterprises (<keyword id="6358354" type="UNKNOWN" weightage="20" keywordseo="MSME">MSME</keyword>). </li><li>The scheme will only be applied to accounts with an outstanding value of ₹250 million or less. In addition, a loan, whether it is in default or not, has to remain classified as “standard” as of 1 January 2019 to be eligible for restructuring. </li><li>The program was a key demand of the central government, which has been looking to give a boost to the country’s small businesses. </li><li>Separately, the RBI announced earlier this week that the overall non-performing asset ratio, which is a proportion of <keyword id="142154" type="PERSON" weightage="20" keywordseo="bad-loans">bad loans</keyword> to all loans, in the banking sector declined for the first time since 2015.</li></ul>In a move that has been in the works for a while, the Reserve Bank of India (RBI) released <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11445&amp;Mode=0">guidelines </a>for a restructuring scheme for the stressed accounts of micro, small and medium-sized enterprises (MSME). The scheme will prevent the restructured loans from being classified as “non-performing”. The scheme will only be applied to accounts with an outstanding value of ₹250 million or less. In addition, a loan, whether it is in default or not, has to remain classified as “standard” as of 1 January 2019 to be eligible for restructuring. If the account has been downgraded, then it won’t fall into the scheme. Under the one-time scheme, banks and non-banking financial entities will have until the end of the 2019-2010 financial year to restructure the eligible accounts. They will also have to incur a 5% provision charge on each restructured loan in addition to existing provisions. Finally, to avail the program, borrowers need to be GST-compliant. The program was a key demand of the central government, which has been looking to give a boost to the country’s small businesses. The issue of credit to MSMEs became a sticking point in the <a href="https://www.businessinsider.in/a-compromise-between-the-rbi-and-the-central-government-could-be-in-the-offing-as-the-board-to-central-bank-prepares-to-meet-next-week/articleshow/66619722.cms">spat between the central government and the RBI</a> towards the end of last year. Despite some hesitation at what the scheme might mean for the banking sector’s bad loan crisis, the central bank eventually relented. At <a href="https://www.businessinsider.in/after-weeks-of-tension-the-reserve-bank-of-india-gives-in-to-some-of-the-central-governments-demands-while-retaining-its-independence/articleshow/66705908.cms">the end of November</a>, it announced that it would formulate a scheme to help small businesses restructure their bad loans. The program will not only provide some relief to India’s small businesses from loans they’ve defaulted on, but will allow them further access to financing. In addition to forming the backbone of the Indian economy with regards to employment and manufacturing, small businesses are also an important vote bank. All that means is catering to the needs of small business owners will be crucial in an election year. The central government is also said to be mulling a plan to raise the minimum sales requirement for small businesses in regards to GST registration. The sales threshold, which is currently ₹2 million could be reportedly raised to <a href="https://www.livemint.com/Companies/rGAwnMFrEDmJAYpRkNqw5N/SMEs-set-to-get-GST-relief-ahead-of-2019-Lok-Sabha-elections.html">as much ₹7.5 million</a>, which will spare smaller businesses from having to comply with the requirements of the taxation policy. Separately, the RBI announced earlier this week that the overall non-performing asset ratio, which is a proportion of bad loans to all loans, in the banking sector declined for the first time since 2015, falling from 11.5% in March 2018 to 10.8% by September 2018. In its <a href="https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSRDECEMBER2018DAFEDD89C01C432786925639A4864F96.PDF">Financial Stability Report</a>, which was released on 31 December, the central bank also predicted that the bad loan ratio would decline to 10.3% by the end of March 2019. SEE ALSO: <a href="https://www.businessinsider.in/after-weeks-of-tension-the-reserve-bank-of-india-gives-in-to-some-of-the-central-governments-demands-while-retaining-its-independence/articleshow/66705908.cms">After weeks of tension, the Reserve Bank of India gives in to some of the central government's demands while retaining its independence</a> <a href="https://www.businessinsider.in/indias-central-bank-chooses-to-keep-interest-rates-on-hold-unveils-a-new-pricing-policy-for-retail-and-small-business-loans/articleshow/66968094.cms">India’s central bank chooses to keep interest rates on hold, unveils a new pricing policy for retail and small business loans</a> <a href="https://www.businessinsider.in/indias-central-bank-is-moving-ahead-with-plans-to-set-up-the-countrys-first-public-credit-registry/articleshow/67226406.cms">India’s central bank is moving ahead with plans to set up the country’s first public credit registry</a>

India’s central bank just gave the country’s small businesses a one-time breather from some of their bad loans — but with a few conditions

(Image source- Reuters) <ul><li>The board of the state-owned <keyword id="6356834" type="COMPANY" weightage="20" keywordseo="indian-oil-corporation">Indian Oil Corporation</keyword> (IOC) has approved a plan to buy back a little over 3% of its total equity shares. </li><li>The fuel retailer will spend around ₹44.4 billion on the buyback plan, culminating in its largest buyback in 17 years. </li><li>The move also includes a dividend payout of ₹6,75 per share, resulting in a total payout of ₹65.6 billion. </li><li>This will result in a huge cash infusion for IOC’s shareholders, especially the central <keyword id="26362" type="ORGANIZATION" weightage="20" keywordseo="Government">government</keyword>, which holds a 54% stake in the oil firm. </li></ul>On 13 December, the state-owned Indian Oil Corporation (IOC) <a href="https://www.bseindia.com/xml-data/corpfiling/AttachLive/22e1d47f-e2d1-4ec5-b78c-f27d5217edb5.pdf">announced</a> in a stock exchange filing that its board had approved a plan to buy back a little over 3% of its total equity shares. India’s largest fuel retailer will spend around ₹44.4 billion on the buyback plan, culminating in its biggest buyback in 17 years. The move also includes a dividend payout of ₹6,75 per share, resulting in a total payout of ₹65.6 billion. It will result in a huge cash infusion for IOC’s shareholders, especially the central government, which holds a 54% stake in the oil firm. However, it could add unnecessary strain to IOC’s finances. At the end of September 2018, it had total debts of <a href="https://iocl.com/download/Q2Results18-19.pdf">around ₹600 billion</a>, compared with a paltry cash balance. It remains to be seen how exactly it will fund the transaction, but it will likely incur a lot more <keyword id="44647" type="ORGANIZATION" weightage="20" keywordseo="debt">debt</keyword>. This, coupled with its <a href="https://www.firstpost.com/business/indian-oil-corps-net-debt-levels-to-rise-due-to-large-capital-expenditure-and-investment-plans-in-medium-term-fitch-4752471.html">high capital expenditure plans</a> in the medium term, could leave it a rather unviable position. The impetus behind the transaction is to help the government, acting through the the Department of Investment and Public Asset Management (DIPAM), meet its <keyword id="44532" type="PERSON" weightage="20" keywordseo="Disinvestment">disinvestment</keyword> target of ₹800 billion for fiscal 2019. It has reportedly collected 68% of that amount so far this year. The DIPAM is reportedly planning to earn as much as ₹50 billion from share buyback programmes of large state-owned enterprises energy firms like Coal India and Bharat Heavy Electricals, according to the Press Trust of India. As per a government order, all public sector enterprises with a cash balance of over ₹10 billion have to undertake share buybacks. Last week, the government also decided to sell a 52.63% stake in infrastructure financier Rural Electrification Corp (REC) to another state-run power lender, Power Finance Corporation (PFC). However, just like IOC, the issue of debt could be a problem here. PFC will have to raise a significant amount of debt to finance the purchase, a tough ask for a firm weighted down by ₹283 billion worth of gross non-performing loans. SEE ALSO: <a href="https://www.businessinsider.in/heres-why-the-indian-governments-intervention-to-stop-rising-fuel-prices-may-only-be-a-temporary-relief/articleshow/66082071.cms">Here’s why the Indian government’s intervention to stop rising fuel prices may only be a temporary relief</a> <a href="https://www.businessinsider.in/indias-reliance-is-teaming-up-with-bp-in-a-move-that-could-send-the-countrys-state-owned-fuel-giants-into-a-tailspin/articleshow/66331991.cms">India's Reliance is teaming up with BP in a move that could send the country's state-owned fuel giants into a tailspin</a> <a href="https://www.businessinsider.in/indias-government-is-asking-its-largest-oil-company-to-sell-fuel-below-global-prices/articleshow/64300993.cms">India’s government is asking its largest oil company to sell fuel below global prices</a>

India’s largest fuel retailer is undertaking its biggest share buyback since 2001 in order to help the central government meet its disinvestment target

<ul><li>On 19 October, <keyword id="47654" type="COMPANY" weightage="20" keywordseo="ArcelorMittal">ArcelorMittal</keyword>, the world’s largest <keyword id="34570" type="COMPANY" weightage="20" keywordseo="steel">steel</keyword>maker, announced that it had been selected as the preferred bidder for Essar Steel by the bankrupt company’s committee of creditors. </li><li>While the Luxembourg-based steelmaker submitted a joint bid of ₹420 billion with Japan’s Nippon Steel &amp; Sumitomo Metal, negotiations for a final price will commence shortly. </li><li>The acquisition of Essar Steel - which includes a production facility in Gujarat capable of producing 10 million tonnes of steel a year - will give ArcelorMittal a significant competitive advantage in India’s steel industry. </li></ul> India’s domestic steel giants must be on high alert. On 19 October, ArcelorMittal, the world’s largest steelmaker, <a href="https://corporate.arcelormittal.com/news-and-media/press-releases/2018/oct/19-10-2018?lang=english">announced</a> that it had been selected as the preferred bidder for Essar Steel by the bankrupt company’s committee of creditors. While the Luxembourg-based steelmaker submitted a joint bid of <a href="https://www.businessinsider.in/arcelormittal-submits-a-higher-bid-for-bankrupt-essar-steel-but-on-one-condition/articleshow/65769020.cms">₹420 billion</a> with Japan’s Nippon Steel &amp; Sumitomo Metal, negotiations for a final price will commence shortly. A decision is expected within the next few weeks. The decision caps an eight-month long saga which saw the company vy for the prized assets of Essar with Russia’s Numetal, which had to bow out of the bidding owing to its inability to pay back the outstanding dues of its affiliates, and Vedanta. The acceptance of the bid marks a win for India’s new <keyword id="43550" type="EVENT" weightage="20" keywordseo="Bankruptcy">bankruptcy</keyword> regime. The bid value represents around 85% of Essar Steel’s outstanding dues. The steelmaker was one of the 12 large non-performing accounts shortlisted for resolution by the Reserve Bank of India in June last year. Earlier this month, on 4 October, ArcelorMittal was ordered to clear the loans of its local subsidiaries first in order to be considered eligible for bidding. The two subsidiaries- Uttam Galva and KSS Petron - had outstanding loans of ₹75 billion. In response, last week, the steelmaker agreed to pay only a portion of the estimated outstanding dues of its subsidiaries- specifically <a href="https://www.businessinsider.in/arcelormittal-isnt-giving-up-on-its-bid-for-essar-steel-without-a-fight/articleshow/66257606.cms">₹45.5 billion</a>. However, the following day, which was incidentally a day before the deadline for the clearing of the loans, ArcelorMittal gave in and decided to pay <a href="https://www.livemint.com/Companies/dKKDpJF1eTazDYzsEkRd7J/ArcelorMittal-to-make-1-billion-creditor-payment-to-bid-for.html">the full amount</a>. A shakeup for the industry The acquisition of Essar Steel will give ArcelorMittal a significant competitive advantage in India’s steel industry. The debt-laden steel maker has a facility in Gujarat that is capable of manufacturing 10 million tonnes a year, making it the largest such plant in India. The complex also includes a natural gas-fuelled power plant and a dry bulk port. It also marks ArcelorMittal’s second stab at the Indian market following the failure of Uttam Galva, which it was forced to exit in order to bid for Essar Steel. The Luxembourg-based steelmaker’s big entry is expected to spur India’s domestic steelmakers, the likes of which include Tata Steel and JSW Steel, to cut costs, speed up operations and price their product offering more competitively. The company, which is owned by <keyword id="29201" type="PERSON" weightage="20" keywordseo="Lakshmi-Mittal">Lakshmi Mittal</keyword>, has a track record of buying up steel mills and turning them around by accelerating production. The acquisition of Essar Steel will enable ArcelorMittal’s expansion and eventual consolidation in the Indian market.

India’s steel industry is set for a shakeup after ArcelorMittal finally emerges as the winning bidder for Essar Steel

<ul><li>Last month, <keyword id="47654" type="COMPANY" weightage="20" keywordseo="ArcelorMittal">ArcelorMittal</keyword> raised its bid for the bankrupt steelmaker from ₹310 billion to ₹420 billion, which included an additional offer to clear the dues of its subsidiaries on the condition that its bid was accepted. </li><li>However, on 4 October, the Supreme Court directed the Luxembourg-based steelmaker to clear all its subsidiaries’ outstanding dues in order to be considered eligible for bidding. </li><li>In response, ArcelorMittal has offered to pay around ₹45.5 billion, well below its subsidaries’ estimated total dues of ₹70 billion. </li></ul>The bidding process for the <keyword id="6357251" type="COMPANY" weightage="20" keywordseo="essar-steel">Essar Steel</keyword> - which was one of the first 12 accounts identified by the RBI for resolution last year - has met with another twist. Last month, ArcelorMittal raised its bid for the bankrupt steelmaker from ₹310 billion to <a href="https://www.businessinsider.in/arcelormittal-submits-a-higher-bid-for-bankrupt-essar-steel-but-on-one-condition/articleshow/65769020.cms">₹420 billion</a>, which included an additional offer to clear the dues of its subsidiaries. This was well above <keyword id="6235176" type="ORGANIZATION" weightage="20" keywordseo="numetal">Numetal</keyword>’s ₹370 billion offer. However, ArcelorMittal’s bid was subject to one condition - it said it would only pay the outstanding loans of Uttam Galva and KSS Petron - which are estimated to be around ₹75 billion excluding interest- if its bid for Essar Steel was accepted. The company took the matter to the Supreme Court, which directed the company <a href="https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/arcelormittal-ready-to-clear-uttam-galva-kss-petron-debt-for-essar-steel-bid/articleshow/66254119.cms">earlier this month</a> to clear the loans of its subsidiaries first, despite the fact that it had sold down its stakes in them in February 2018 before the bidding process commenced. The directive extended to Numetal as well, which is also dealing with outstanding dues of its own. The the Luxembourg-based steelmaker was deemed ineligible to bid for Essar Steel in the first round earlier this year because its two aforementioned subsidiaries had defaulted on their loans. Under the rules of the Indian <keyword id="43550" type="EVENT" weightage="20" keywordseo="Bankruptcy">bankruptcy</keyword> code, wilful defaulters or entities associated with wilful defaulters cannot bid for bankrupt firm. Now, as per a letter sent last week to the Essar Steel’s creditors seen by media outlets, ArcelorMittal has agreed to pay a portion of the estimated outstanding dues of its subsidiaries- specifically ₹45.5 billion - based on its own calculations of the principal and interest owed on its subsidiaries’ loans. This includes nearly ₹40 billion worth of loans and external commercial borrowings on Uttam Galva’s books with the rest coming from KSS. If the proposal, which is still pending the approval of ArcelorMittal’s board, is accepted by the committee of creditors, then the Luxembourg-based steelmaker will no longer have to worry about the eligibility of its bid. However, it is taking a large gamble given the possibility that it could lose the bid to Numetal. The deadline for the payment of the outstanding dues is 18 October.

ArcelorMittal isn’t giving up on its bid for Essar Steel without a fight

<ul><li><keyword id="45660" type="COMPANY" weightage="20" keywordseo="Yes-Bank">Yes Bank</keyword>, which is India’s third-largest private sector lender, has lost more than half its <keyword id="6463972" type="UNKNOWN" weightage="20" keywordseo="market-value">market value</keyword> since 20 August as it deals with succession and compliance issues. </li><li>On 20 September, the <keyword id="30067" type="ORGANIZATION" weightage="20" keywordseo="RBI">RBI</keyword> refused to extend the tenure of Yes Bank <keyword id="5645" type="POSITION" weightage="20" keywordseo="CEO">CEO</keyword> <keyword id="128581" type="PERSON" weightage="20" keywordseo="Rana-Kapoor">Rana Kapoor</keyword>’s term, which precipitated a dramatic <keyword id="5683" type="ENTERTAINMENT" weightage="20" keywordseo="Crash">crash</keyword> in the bank’s share price. </li><li>Following a risk review by the RBI last year, it came to light that Yes Bank had underreported ₹63.6 billion worth of non-performing loans. </li></ul>As a central banking regulator, the Reserve Bank of India can usually be counted on to support the banking sector and ensure the health of the institutions it oversees. However, in the wake of its attempts to clean up a system riddled by bad loans, it might have facilitated the downfall of some banks. Yes Bank, which is India’s third-largest private sector lender, has lost <a href="https://www.google.co.in/search?q=yes+bank+share+price&amp;oq=yes+bank+share+price&amp;aqs=chrome.0.0l6.4046j0j7&amp;sourceid=chrome&amp;ie=UTF-8">more than half</a> its market value since 20 August - from ₹910 billion to ₹438 billion-, as its share price has been in a freefall. Investors feared that the RBI would not approve the extension of the CEO Rana Kapoor’s tenure, which was set to expire on 31 August. Those fears were confirmed last week, when the RBI <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-allows-rana-kapoor-continue-as-yes-bank-md-ceo-till-january-end/articleshow/65875341.cms">refused to extend</a> Kapoor’s term, capping it at 31 January 2019, which precipitated a dramatic crash in the bank’s share price. On 20 September, when the decision was announced, the bank’s stock fell by a whopping 29% as the fears and uncertainty over its future leadership became compounded. That marks a loss of over $3 billion in market value on one day alone. Rana Kapoor founded the bank in 2004, steering it towards a dramatic rise in the ensuing decade. However, in his quest to expand the bank’s operations and loan book at a rapid pace, a number of issues were overlooked. Following a risk review by the RBI in October last year, it came to light that Yes Bank had underreported ₹63.6 billion worth of non-performing loans. There were also allegations that the bank had direct dealings with a trust run by Kapoor’s family and that it had window-dressed some of its large corporations to look financially stronger than it actually was. As the country grappled with a bad loan crisis, the RBI wasn’t in a forgiving mood. Since then, the future of Kapoor has been under intense speculation. Earlier this year, the RBI also refused to clear a three-year extension of the tenure of Shikha Sharma, the CEO of Axis Bank, as the bank dealt with its own host of bad loan calculation problems. To reassure investors and stabilise its share price, Yes Bank could have announced a successor for Kapoor this week. However, on 25 September, it wrote to the RBI again asking the regulator to reconsider its decision to trim Kapoor’s tenure, asking for an extension till September 2019. The RBI is expected to decline the bank’s request. That being said, the bank has set up a search committee to find a replacement for Kapoor. In addition to this, their immediate priority should be to draw up an effective turnaround plan in order to limit any further damage to their market cap.

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