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Banks' financials a pack of lies, RBI keeping mum: Ambit

In a strongly worded report titled 'The debasing of the RBI and the negative consequences for Indian banks', Ambit strategist Saurabh Mukherjea has written that over the years, RBI has been robbed of its independence in both monetary policy and banking supervision.

October 30, 2012 / 10:49 AM IST
 
 
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Moneycontrol Bureau


Brokerage house Ambit feels that Indian banks' financial numbers are not "worth the paper they are written on" and is of the view that the Reserve Bank of India is turning a blind eye to the rampant cooking of books by both private and public sector banks.


In a strongly worded report titled 'The debasing of the RBI and the negative consequences for Indian banks', Ambit strategist Saurabh Mukherjea writes that over the years, RBI has been robbed of its independence in both monetary policy and banking supervision.


According to Mukherjea, the trouble started in August 2008 when during the run up to the global financial crisis, the RBI permitted banks to restructure loans without having to downgrade the asset classification. The revised rule meant a loan could still be treated as a standard asset even after it was restructured, without the bank having to make provisions for it. (When borrowers are unable to repay, loans are restructured by relaxing the original tenure/rate of interest/terms of repayment. Normally, banks have to make provisions for bad loans) This resulted in the quantum of restructured assets steadily rising over the last four years.


"The signal that such a retrograde intervention gave to the banking sector was that the RBI was seemingly willing to turn a blind eye to banks that cooked their balance sheets i.e. those that kept restructuring assets, which were palpably dud and those that even refused to restructure assets, which were dud (thanks to evergreening)," writes Mukherjea.


"Subsequently, during FY11 and FY12, even as the economy slowed down and even as some of the public sector banks stepped up their restructuring, the private sector banks decided that they too were simply not going to come clean vis-a-vis  the quality of their assets," Mukherjea writes.


And his contention is that RBI chose to turn a blind eye rather than hauling up the private banks.


"The RBI kept mum perhaps because of the fear that if public sector banks too are forced to do sensible accounting then the recapitalization that it implies will burden the Exchequer even further and, perhaps, seal the downgrade of India’s sovereign credit rating," he writes.


And here are six reasons why Ambit thinks Indian banks are grossly under-capitalised


* Loans to the power, roads, commercial real estate, telecom and aviation sectors amount to over USD 140 billion (or around 20% of system assets).


* Now, assume that only a quarter of these assets (or 5% of system assets) will end up being economic losses.


* Of the rest of the loans in the Indian economy (the other 80%), assume that only 5% will end up being economic losses due to the prolonged effects of the economic downturn. (Since gross NPAs as a per centage of loans outstanding averaged 2-3% even in the glory days of the Indian economy in FY04-07. So a doubling of that is not unreasonable given the marked slowdown of the economy.)


* Adding the two set of economic losses (5% + 4%) suggests that 9% of Indian banks' assets have little or no economic value and hence, cannot be recovered. This, in effect, amounts to roughly 100% of their shareholders' equity.


* Compare this 9% to the currently declared NPA figure for the banking system at 4% (of loans outstanding) and you get a sense of how useless the currently published financial statements of the Indian banks are.

*If our estimate of the proportion of loans that are dud in the Indian banking system is right (at 9%) then that implies that Indian banks' Tier 1 is 5% (and not over 10% as the banking system and the RBI often claims it to be). Obviously, 5% is significantly short of the RBI's core Tier-1 requirement of 8% (under Basel-III) suggesting that we have a grossly under-capitalized banking system.

first published: Oct 29, 2012 03:34 pm