Banks may set up holding companies, SPV to raise funds

Exhorting public sector banks to take tough action against wilful defaulters, Finance Minister P. Chidambaram on Tuesday said a situation where ‘promoter is prosperous but company is sick’ was not acceptable.

In his meeting with heads of state-owned banks, he said tough measures needed to be taken against wilful defaulters.

Mr. Chidambaram said the “promoter is prosperous but company is sick” was not an acceptable position, and asked banks to “form a consortium and take joint action against such defaulters.’’

While addressing the bankers, he said they needed to redouble efforts for the recovery and take tough measures against wilful defaulters.

The top 30 non-performing assets (NPAs) of state-owned banks accounted for 40.2 per cent of their gross NPAs.

Talking to reporters after the meeting, Financial Services Secretary G. S. Sandhu said banks had been asked to focus on their top 30 defaulters.

“(There will be) tough action against wilful defaulters, which can include even the change of management because so much money is stuck. Banks have to provide huge amount in terms of provisioning, about Rs.90,000 crore going into provisioning.

“So we want to recover that. If the original borrower does not come up with some option of repayment, then we will call some other person, if he is able to provide that then assets could be handed over to the other person,” Mr. Sandhu said.

According to an official statement, the sluggishness in domestic growth during the recent past and the tepid recovery in the global economy have impacted the NPAs. Gross NPAs of PSBs have risen from 3.84 per cent as on March, 2013m to 4.44 per cent as at the end of March, 2014.

“However, from a peak of 5.07 per cent, GNPAs in the third quarter ending December, 2013, have come down to 4.44 per cent (provisional) in the last quarter of the year ending March, 2014,” it added.

CEOs of PSU banks at the meeting elaborated upon the measures being taken to bring down the NPAs.

The statement further said the slowing down of the economy had impacted the results of the banks. Year-on-year deposit growth of 19 PSBs as on March 31, 2014, was 11.43 per cent and advances growth was 10.69 per cent.

Gross NPAs had increased and net profit had decreased vis-a-vis the performance reported in 2012-13.

The housing sector, including priority sector housing, saw a growth of 18.4 per cent during 2013-14 with a total lending of Rs.5,408 lakh crore.

NPAs in housing loan had reduced from 1.8 per cent in 2012-13 to 1.47 per cent in 2013-14.

Mr. Sandhu also said public sector banks had met their lending target to minorities (15 per cent of priority sector lending).

The number of students availing themselves of education loan had gone up to 25.72 lakh accounts with a credit outstanding of Rs.58,265 crore.

Capital support

Meanwhile, the Finance Ministry on Tuesday asked public sector banks to explore the possibility of setting up holding company and special purpose vehicle (SPV) to raise funds for expansion as the government might not be able to provide more than Rs.8,000 crore additional capital support this fiscal.

Mr. Sandhu said various options such as ESOPs, SPV model and holding company model were discussed during the meeting by which banks could raise funds from the market to meet their capital requirement.

However, no decision on any of the options was taken for want of clearances from regulators like SEBI and the IRDA.

“We have been telling banks that they should come out with out-of-box options...because they will also have the responsibility to raise funds from the markets,” he said.

One option, he said, a bank could set up an SPV to which it will transfer its real estate assets. The bank then could pay rental or lease to the SPV to create an income stream for the SPV.

“Based on this income stream, the SPV will raise money from the market,” he added.

Under the bank-wise holding company model suggestion, he said, the bank would transfer all its subsidiaries to the new company which in turn could tap market for funds.

“The RBI has approved it (holding company model). We are waiting for SEBI’s reply… then we will go ahead,” he said.

Another option, he said was the perpetual bond route to raise capital.

“The RBI has agreed. The IRDA has more or less agreed, we are waiting for their final approval,” he added.