Banks Performance by lfs18405

VIEWS: 0 PAGES: 27

Banks Performance document sample

More Info
									  Improving
Indian Banks’
Performance
      by
James A. Hanson
                        Overview
• India liberalized credit markets to support the real
  reforms/more credit for the private sector.
• Benefits but increasingly limited by
   – Crowding out from public debt and deficits
   – Weak Incentives for debt service, related to weak judicial,
     informational and institutional incentives
• Weak incentives in public banks, not generating enough
  capital for growth, especially of private credit.
• Need to focus on incentives for principal agents (banks)
• Regulators face New Challenges
• Resolution of problems more urgent now that other
  sources of private sector finance drying up.
India Started bank liberalization in 1992
Focus on Markets: price, alloc., competition
• Reduced directed credit allocation (SLR)
• Gradually liberalized interest rates, even on priority credit
• Increased competition
   – Let clients switch banks, Reduced RBI lending control
   – Licensed new private, quasi-private and foreign banks
   – Non-bank intermediaries grew until the 1997 crisis
   – Liberalized the capital market
   – Allowed offshore borrowing and capital inflow.
• Strengthened regulation and supervision, unlike most
  liberalizing countries
• Liberalization largely completed by 1997-98
Reforms Restarted Dep. Growth
                                                                          Figure 1
                                                              India: Money(M3 in Sept.): GDP,
                                                                   Deposit Rate & Inflation
                                                                     M3/GDP
                                  40.0                                                           M3+NBFCs % of GDP                  70.0

                                  35.0                                                                                              60.0
Interest Rate and Inflation (%)




                                  30.0
                                                                                                                                    50.0




                                                                                                                                           M3 (% of GDP)
                                  25.0      Ave. M3/GDP, 1987-92
                                                                                          Interest Rate                             40.0
                                  20.0                                                      1 yr. Deposit
                                                       Inflation (CPI)                                                              30.0
                                  15.0
                                                                                                                                    20.0
                                  10.0

                                   5.0                                                                         Free                 10.0
                                                                                                               Rate
                                   0.0                                                                                              0.0
                                         1977


                                                1979

                                                       1981


                                                              1983

                                                                     1985


                                                                            1987

                                                                                   1989

                                                                                          1991


                                                                                                 1993

                                                                                                        1995

                                                                                                               1997

                                                                                                                      1999


                                                                                                                             2001
    Other Sources of Private Credit Grew
•  NBFCs
•  Equity—easier rules and entry of foreign players
•  Bonds and Private Placements
•  Offshore borrowing.
                             But
• NBFCs have declined since 1997 crisis
• New inflows and demand for offshore funds drying up.
• India’s capital market is one of largest but it is down
 India is still bank dominated: Banks assets more than
   double market capitalization. Banks are critical
Private credit growth, bank performance
were not up to expectations. Why?
1. Crowding out by Government Debt
2. Large Role of Public Sector Banks
3. Large NPLs
  –   Weak judicial and informational framework
  –   Public banks lack incentives
4. Profit Squeeze on Banks limits internal
   capital generation, raises risks.
 Crowding out: Gov. debt absorbed much of
bank growth, reflecting its large deficit; credit
                grew slowly
        Figure 2. India: Banks' Government Debt, Credit, and Investments
                         Selected Years (percent of GDP)

  60%

  50%


  40%


  30%


  20%


  10%

  0%
        85-86               90-91              95-96                 98-99         00-01

                   Credit    Gov. Debt   Other Elig. Invest.   Other Investments
 Gov. Debt/Dep. , 2000, Percent (IFS)
Korea          -3.6   Philippines   22.7
Chile          -3.1   Hungary       23.0
Thailand        1.4   Pakistan      24.6
Malaysia        2.3   Morocco       26.5
Peru            3.2   Argentina     30.8
S. Africa       4.9   India         34.6
Czech Rep.      4.9   Russia        35.3
China           6.0   Brazil        43.3
Egypt           7.8   Mexico        48.8
Venezuela       8.2   Algeria       50.6
Bangladesh     10.9   Indonesia     56.3
Poland         14.8   Turkey        64.7
Colombia       16.4   Average       21.4
    Gov. Debt is attractive but it
    must held even if it weren’t
            attractive
• Gov. Debt has low risk, low capital weight, no
  priority sector obligation, making it attractive

• But macroeconomic constraints mean that Gov.
  debt has to be held, if not by banks, then by the
  public, meaning less deposits, so still crowding out
• Crowding out is now by interest rates, not by fiat,
  but it is still crowding out.
• Attractiveness of Gov. debt simply determines
  interest differential between public and private
  debt.
Large Public Sector Bank Role
       Figure 3. Asset Shares of Commercial Banks by Type
                                         New Private Banks

100%
                           Old Private Banks
90%                        Foreign Banks
80%                       Reg. Rural Banks
70%
60%
50%                       Nationalized Banks
40%
30%
20%
                          State Bank Group
10%
 0%
          1993-94                                            2000-01
    Large Public Sector Bank presence
   associated with slower financial and
   economic development, worldwide
• Weak incentives for sound lending and collection
  Credit Misallocation (bad lending & collection processes)
  Borrowers develop culture of non-payment.
• Weak Governance:
   –   Multiple Conflicting Goals
   –   Political Interference
   –   Lack of clear incentives to staff, who become an interest group.
   –   Weak Information/non transparency
• Lower effective lending rates crowd out private banks
• Difficulties in Regulation & Supervision
• Result is often costly ―skeletons‖ for governments
 Credit Misallocation: Banks’ Gross
NPLs High by International Standards
                               Figure 4
             India:Non-Performing Loans by Bank Groups
                             (% of Loans)

     20.0
                            Public Sector
     15.0
                                                                 12.4
              Old Private                                        11.1
     10.0
                                                                  6.8
               Foreign
      5.0
                                                                  5.1
               New Private
      0.0
               1997         1998        1999        2000       2001

  Source: RBI, Trend and Progress in Banking, various years.
NPLs represent misallocation
• Either borrowers are getting credit they
  cannot repay—poor selection of borrowers
                       Or
• Defaults mean someone must bear the cost,
  other borrowers (higher rates), depositors
  (lower rates), or taxpayers (bailout).
       Q. Why are NPLs High?
         A. Poor Incentives.
1. Weak legal (judicial) framework
  – Slow Judicial Proceedings, BIFR
  – Debt Tribunals have not been enough
  – Will new ordinance become law and make a
    difference?
2. Poor information on borrowing
1. And 2. Mean Poor incentives:
  – Why pay?
  – No credit record to maintain.
   Why are NPLs high (cont.)?
• Public sector banks have NPL problems
  worldwide. In India worse than even ―old‖
  private banks, which have similar clientele.

• In Public sector banks, what are incentives
   – To choose borrowers well?
   – To collect promptly?
   – To use good contracts?
                     Competition has pushed down
                            bank margins
                                                 Average Interest Margins

                    4.5

                     4

                    3.5
Percent of Assets




                     3

                    2.5

                     2

                    1.5

                     1

                    0.5

                     0
                          95-96        96-97            97-98            98-99          99-00             00-01

                                  public banks       private banks old     private banks new    foreign
                            Public Sector banks face a squeeze from
                            competition, poor lending, and high costs

                                                          Figure 6
                                India: Costs, Provisions and Net Profits (Sum= Net Revenue)
                                                         2000-2001
                                                                                    Oth
                                                                                    Costs
                    7

                    6
                                                                                                       0.93
Percent of Assets




                    5

                    4                       Net
                                 0.42                                     Provis.
                                            Profits         0.62
                    3                                                                 0.81
                                            Provis.
                                            Other
                    2
                                            Costs
                    1            2.03
                                             Wages
                    0
                         public sector banks          old private banks         new private banks   foreign banks

                    Source: RBI, Trend and Progress in Bank ing, 2000-2001
                              Profits have fallen
                               Figure 7. India: Net Profit by Bank Group
                                           1995-96 to 2000-01

              2.00


              1.50

                                                                                   Foreign
              1.00
% of Assets




                                                                                       New Pvt.
                                                                                       Old Pvt.
              0.50
                                                                                   Public

              0.00
                      95-96       96-97       97-98        98-99           99-00    00-01

              -0.50
           Need more profits to
•   Write-off bad loans
•   Keep pace with growth
•   More private lending
•   Stronger regulation and supervision
    – Best Practices
    – Basel II


• Privatize?
       More Profits require:
• Better lending
• Lower costs
Or
• Larger spreads (lenders pay more,
  depositors get less)

Or Gov. will have to add capital
Prerequisite to more private
           credit
  Reduce Crowding Out
      Better Performance(1):
Better Legal & Judicial Framework
Better incentives to service debt
• New bankruptcy law will help/BIFR
  revamping.
• Debt tribunals need
  – more support,
  – faster deliberations, and
  – penalties for willful default and delay
• New ordinance: will it work?
    Better Performance (2) :
 Better Information Framework
Improve incentives to service debt,
  select borrowers better.
• Credit registry
  – who will manage it?
  – include non-banks and small
    borrowers.
   Better information improves
              Access
• Small have asset: good credit rating
• But system must go down to small loans

• Which institutions can best provide access?
• Currently, priority sector loans getting
  bigger, and rates constrain small lending.
     Better Performance (3)
  Cutting Costs in Public Banks
• VRS will help, but needs to be managed
• Computerization needed, but funds are
  lacking. Why can’t India export banking
  services?
• Reducing or selling branches
• Mergers

Needed: An Exit Policy for Banks
       Better Performance(4)
Better Incentives for Better Lending

  • Public banks need to improve incentives for
    – Selection of sound borrowers
    – Collection of debt service
  • Privatization:
    – Few examples of public banks that work well.
    – But low profits and lack of interest by foreign
      investors may make privatization difficult.
   Challenges to Reg & Supervision
• Private Banks and Moral Hazard
• Deposit Insurance levels
Strengthening of Regulation & Supervision to
  Best International Practices
For example, exposure limits, connected lending,
  income recognition, provisioning, and prompt
  corrective action.
Particularly important for private banks without
  a reputation to protect.

								
To top