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Banking and Finance: Farmer friendly move - banks allowed to write - off loans |
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In a relief to farmers who had defaulted on loan repayments, the government and the Reserve Bank of India (RBI) have allowed banks to write-off loans even if only a part of the 75 per cent outstanding amount, as stipulated in last year’s debt relief scheme, was repaid. The only condition is that the government would not provide additional funding and restrict reimbursement to the bank to 25 per cent of the outstanding amount. In addition, the government has allowed banks to recover the 75 per cent outstanding amount in one tranche instead of three installments as was provided originally.
Farmers, who had defaulted on loan repayment, would however, be required to make the payment by the month-end to continue to be eligible for the scheme.
Under the loan settlement scheme, a farmer was eligible for 25 per cent relief, if he cleared 75 per cent of the outstanding amount. But many farmers could not meet the stipulated deadlines and found themselves in a situation where they ran the risk of missing out on the benefit of the biggest ever farm loan relief and waiver scheme. This prompted banks to approach the finance ministry, which issued the required instructions.
The logic of the government is that “the ultimate aim was to clean up the books of banks and make thousands of farmers, who had defaulted on loan repayment, to be eligible for fresh loans. If we can do so by tweaking the scheme a little, without any impact on banks or government finances, then there is nothing wrong”.
Moody’s review of the Indian banking system
Moody’s Investors Service has warned that Indian banking system’s asset quality could come under strain, with higher levels of non-performing loans, as a reversal of the favourable credit cycle that has underpinned robust Indian loan growth over the past few years has gradually occurred and there has been a weakening in business and corporate earnings.
Pointing out that the global de-leveraging process had caused large capital outflow from India since late 2008, the global credit rating agency said, “This has tightened the provision of credit to the real economy from the banks and raised the capital costs for corporates.”
Moody’s emphasised that certain rated Indian banks – especially in the private sector – are well capitalised and capable of absorbing the related costs of the negative credit outlook. Private sector banks have been able to raise significant amounts of fresh equity in the past few years by leveraging favourable capital market conditions, both locally and globally.
On the other hand, certain public sector banks (PSBs) may need fresh equity as they face both tighter Tier I capital ratios and limited ability to raise new capital, given their government shareholding levels are close to the 51 per cent threshold.
Referring to the recent statements by the government that it may consider the option of recapitalising PSBs to strengthen their financial position, Moody’s said any commitment by the government on this front would be welcome from a creditor and rating perspective.
Profitability and deposit base: The profitability ratios of India’s commercial banks, according to Moody’s, were relatively moderate, but their core recurring income and profits had climbed in recent years, implying they had been leveraging growth opportunities and enhancing earnings capacity, in turn supporting their balance sheet strength and financial muscle.
A positive and important rating driver for all the rated Indian banks, in particular the PSBs, the rating agency felt, was their robust deposit franchisees, which assure them of a relatively cheap and stable source of funding and a comfortable liquidity profile. This means that Indian banks have little to no dependence on wholesale funding, with no repercussions on margins from the possible roll-overs – at much higher cost in the current credit environment – of any outstanding debt.
In terms of efficiency, Indian commercial banks boast of a cost-to-income ratio of around 50 per cent, a figure that compares favourably with the ratios of other international banks.
Moody’s has assessed India as a high support country, based on a strong track record of support provided to commercial banks by the authorities, especially to majority government-owned banks. Even small private sector banks have enjoyed a high level of support in recent years as they have usually been bailed out through mergers with larger PSBs.
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