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Bank Crisis Hits India: “Bank Stops Functioning, People Crying Outside Bank Branches”

Bank Crisis Hits India: “Bank Stops Functioning, People Crying Outside Bank Branches”

The Punjab Maharashtra Co-operative Bank (PMC), in India, has been caught cooking the books and misreporting non-preforming loans (NPL) of Mumbai-based real estate developer Housing Development and Infrastructure Ltd (HDIL). As Reuters reports,  PMC hid the bad loans with 21,000 fictitious accounts, which has spooked depositors, investors and government officials,

Reuters learned about the massive fraud through a complaint filed with the Economic Offences Wing (EOW) of Mumbai Police earlier this week, alleges that PMC concealed $616 million in NPLs. 

BloombergQuint said PMC’s loan book had a 73% exposure to HDIL’s failed real estate dealings. 

“The actual financial position of the bank was camouflaged, & the bank deceptively reflected a rosy picture of its financial parameters,” said the complaint, noting that the fictitious loan accounts were not entered into the bank’s core banking system – a factor key in the perpetration of a $2 billion fraud at Punjab National Bank that was uncovered in 2018, said Reuters. 

The complaint says PMC’s Chairman Waryam Singh and its Managing Director Joy Thomas were at the center point of the fraud. It also names HDIL’s former senior executives Sarang Wadhwan and Rakesh Wadhwa, who were the recipients of the real estate loans. 

As recession fears intensify in India, the PMC banking crisis has ignited the debate among government officials that the banking sector could be headed for turmoil.  

The Reserve Bank of India (RBI) took over PMC last week and has prevented the bank from new loan creation, while nearly 900,000 depositors have been informed that capital controls are being placed on their accounts for six months. 

Dozens of videos have been uploaded to social media this week, detailing how depositors are being locked out of their accounts, some fear the worst, as the bank has likely failed. 

 …click on the above link to read the rest of the article…

Bangladesh’s Central Bank Offers Amnesty To Delinquent Borrowers, Prompting Mass Default

Bangladesh’s Central Bank Offers Amnesty To Delinquent Borrowers, Prompting Mass Default

Bangladesh’s Central Bank in May introduced an amnesty program that allowed delinquent borrowers to make a small upfront payment and then pay off the rest of their debt over 10 years at favorable interest rates, according to Bloomberg.

However, the plan also triggered a rush by healthy companies to reschedule debt on the same terms which, in turn, now threatens to overwhelm the country’s banks.

The program is also seen as encouraging those with debt to default. Big surprise, right?

Anis A. Khan, managing director of Dhaka-based Mutual Trust Bank Ltd. said: 

“I’m traumatized by non-performing loans. Borrowers have been using every excuse they can find — from a death in the family to political uncertainty — to try to get onto the central bank program.”

The initiative is available to borrowers until September 7 and created a “perverse incentive” to default. Now, the country is expecting that nonperforming loans may rise significantly from 11.9% in March as a result of the program.

The upfront payment was lowered to 2% from 10% for those who are defaulting for the first time. The maximum interest rate over the next 10 years was set at 9%, even if borrowers were paying as high as 15% previously.

And like all other great “Band-Aid” fixes to debt problems, the initiative has backfired: it has created a sense among Bangladeshi companies that people can get away without paying back their loans. That, in turn, poses a threat to the wider economy and a banking system that is already overwhelmed with defaults.

The central bank, meanwhile, says that the policy will help revive lending growth in an economy that is dependent on attracting investment to sustain growth. Asian Development Bank predicts that the country’s economy will expand 8% over the next two years.

Shitangshu Kumar Sur Chowdhury, banking reforms adviser at Bangladesh Bank said:

 …click on the above link to read the rest of the article…

In Shock Move, India Nationalizes Giant Shadow Bank At Center Of Market Rout

One week after we reported that India’s NPL crisis finally erupted after IL&FS, a major shadow bank at the heart of India’s economy defaulted in one day on three debt payments, India’s government announced on Monday that it would immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds.

The nationalization is virtually unprecedented: the nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services in 2009. A bid by the government to take control of debt-laden realty firm Unitech in late 2017 was stalled by the Supreme Court after the move was challenged.

According to Bloomberg, officials ousted Infrastructure Leasing & Financial Services Ltd.’s entire board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves.

An AAA-rated entity for decades, over the last few years IL&FS, saw an increase in its debt levels. The situation worsened in the last two months with both the parent company and its subsidiaries defaulting on a number of repayment obligations. Banks and insurance companies have the largest exposure to IL&FS.

For India to resort to such a dramatic move, the panic must have been palpable: the nationalization, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy.

…click on the above link to read the rest of the article…

India’s NPL Crisis Erupts: A Major Shadow Bank Defaults On Three Debt Payments

IL&FS Investment Managers, a unit of India’s Infrastructure Leasing & Financial Services (IL&FS) – an Indian infrastructure development and finance company and one of the nation’s largest “shadow banks” – which announced three debt defaults on Friday, said on Saturday morning its Managing Director Ramesh Bawa had resigned as managing director and chief executive officer as a management exodus begins. The company’s independent directors – Renu Challu, Surinder Singh Kohli, Shubhalakshmi Panse and Uday Ved – had also submitted their resignation papers.

The company first defaulted on commercial paper, then on short-term borrowings known as inter-corporate deposits according to Bloomberg. It has also failed to pay Rs 4.5 billion ($62 million) in ICDs to government-backed lender Small Industries Development Bank of India.

As we noted on Friday, IL&FS revealed a series of three defaults on its non-convertible debt obligations and inter-corporate deposits.

With the meltdown of IL&FS in motion, another unit, IL&FS Transportation Networks, reported that its chief financial officer, Dilip Bhatia, was demoted to chief strategy officer, for the goal of divestment of assets. The regulatory filing said Bhatia would relinquish his responsibilities as CFO with immediate effect, and the company will search for a replacement.

The shockwaves spread further on Friday, when IL&FS Financial Services, another unit of the IL&FS group, said its managing director and chief executive had resigned.

Why is this important? IL&FS’s outstanding debentures and commercial paper account for 1% and 2% respectively, of India’s domestic corporate debt market as of March 31, according to Moody, while its bank loans made up about 0.5% to 0.7% of the entire banking system loans.

And while bad loans in the Italian banking system have received a ton of attention from investors, India is not far behind and India’s economic recovery is built on an even shakier foundation.

…click on the above link to read the rest of the article…

ECB Capitulates On Defusing Eurozone’s “$1 Trillion Ticking Time Bomb”

In late 2017, the ECB surprised central bank watchers, briefly spooked markets, and angered many Italians, with its plan to eradicate what many have dubbed the “ticking time-bomb” at the heart of the Eurozone, namely the roughly $1 trillion in non-performing loans across European banks (a number which is materially higher in reality as Euro banks were recently caught misrepresenting it).

The ECB then quickly came under fire – mostly from Italy whose banks have the biggest notional amount of bad loans – for demanding that banks set aside far more capital as loss buffer for when the €900 billion in bad loans are ultimately discharged.

Fast forward six months when it now appears that the European central bank came, saw… and ran away when faced with what now appears to be an certifiably insurmountable problem: as Reuters reported this morning, the ECB “is considering shelving planned rules that would have forced banks to set aside more money against their stock of unpaid loans, after suffering a political backlash.

The NPL guidelines, which were already delayed by a month, and were expected by March, were pitched as a key anchor of the ECB’s plan to bring down the $930 billion pile of non-performing credit that has crippled eurozone banks for the past decade, particularly those in Greece, Cyprus, Portugal and Italy.

Instead, the ECB is now planning to tactically surrender as there NPL problem has proven too massive for banks to be able to officially address it, or as Reuters put its far more politically, “the ECB was now considering whether further policies on legacy non-performing loans were necessary depending on the progress made by individual banks.” Of course, since there has barely been any progress in resolving this issue, the conclusion is simple: the ECB is no longer pushing for an NPL resolution, as there simply isn’t a viable one.

…click on the above link to read the rest of the article…

114 Italian Banks (Roughly 23%) Have NPLs Exceeding Tangible Assets

114 Italian Banks (Roughly 23%) Have NPLs Exceeding Tangible Assets

114 Italian banks have non-performing loans that exceed tangible assets. Ratios above 100% are signs of severe stress.

The headline image is from the from ilsole24ore.com. The article is dated March 25, 2017. The translated headline reads “Here are the 114 Italian banks at risk for suffering

The image shows 24 banks where non-performing loans total 200% or more of tangible assets.

The image title “Texas Highest Rate” refers to a measure of banking stress called the “Texas Ratio“.

The Texas Ratio was developed by Gerard Cassidy and others at RBC Capital Markets. It is calculated by dividing the value of the lender’s non-performing assets (NPL + Real Estate Owned) by the sum of its tangible common equity capital and loan loss reserves.

In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.

Texas Ratio Analysis

In 2012, the Dallas Fed did an article on the So-Called Texas Ratio.

“So-called” pertains to a discussion as to whether or not the measured should be renamed the “Georgia Ratio”.

Georgia Ratio?

US vs Italy (6% vs 23%)

At the peak of the SNL crisis in the 1980s, just over 5% of US banks had Texas ratios over 100%.

In the Great Financial crisis the number approached but did not top 6%.

In Italy, 114 of “almost” 500 banks have NPLs that exceed tangible assets. If were to add real estate owned (bank-owned real estate) to the Italian banks, they would be in even worse shape.

2015 Data

The caveat in this analysis is the article’s numbers are from 2015. But are Italian banks better or worse today?

I suspect worse.

…click on the above link to read the rest of the article…

PBoC Spins China’s Bad-Loan Data

PBoC Spins China’s Bad-Loan Data

In a recent speech at Bloomberg’s headquarters in New York, People’s Bank of China Deputy Governor Yi Gang reassured his audience on the level of non-performing loans (NPLs) in the Chinese banking sector.  It had, he said, “pretty much stabilized after a long period of climbing.  That’s a good development in the financial market.”

Yi was referring to NPLs as a share of total loans, which, as shown in the figure above, have stabilized over the past year.  But this is misleading.  NPLs have actually continued to grow—by RMB 238 billion ($35 billion) in 2016, reaching a total of RMB 1.5 trillion ($220 billion).  The reason the NPL ratio has stabilized is that Chinese banks have extended more loans, boosting the denominator—not because they have reduced their exposure to bad loans.

In short, Yi is spinning.  China’s bad-debt problem remains serious.

The Italian Banking Crisis: No Free Lunch – Or Is There?

The Italian Banking Crisis: No Free Lunch – Or Is There?

It has been called “a bigger risk than Brexit”– the Italian banking crisis that could take down the eurozone. Handwringing officials say “there is no free lunch” and “no magic bullet.” But UK Prof. Richard Werner says the magic bullet is just being ignored. 

On December 4, 2016, Italian voters rejected a referendum to amend their constitution to give the government more power, and the Italian prime minister resigned. The resulting chaos has pushed Italy’s already-troubled banks into bankruptcy. First on the chopping block is the 500 year old Banca Monte dei Paschi di Siena SpA (BMP), the oldest surviving bank in the world and the third largest bank in Italy. The concern is that its loss could trigger the collapse of other banks and even of the eurozone itself.

There seems little doubt that BMP and other insolvent banks will be rescued. The biggest banks are always rescued, no matter how negligent or corrupt, because in our existing system, banks create the money we use in trade. Virtually the entire money supply is now created by banks when they make loans, as the Bank of England has acknowledged. When the banks collapse, economies collapse, because bank-created money is the grease that oils the wheels of production.

So the Italian banks will no doubt be rescued. The question is, how? Normally, distressed banks can raise cash by selling their non-performing loans (NPLs) to other investors at a discount; but recovery on the mountain of Italian bad debts is so doubtful that foreign investors are unlikely to bite. In the past, bankrupt too-big-to-fail banks have sometimes been nationalized. That discourages “moral hazard” – rewarding banks for bad behavior – but it’s at the cost of imposing the bad debts on the government. Further, new EU rules require a “bail in” before a government bailout, something the Italian government is desperate to avoid.

…click on the above link to read the rest of the article…

Monte Paschi Rescue On The Rocks: Regulators Now “Expect Bank To Ask Italy For Bailout”

Monte Paschi Rescue On The Rocks: Regulators Now “Expect Bank To Ask Italy For Bailout” 

Ever since two months ago, when Italy’s third largest bank – and the world’s oldest – Sienna’s Monte dei Paschi, failed Europe’s latest stress test, it had scrambled, and assured markets, that it would obtain a private sector cash injection, aka bailout, amounting to roughly €5 billion in fresh capital, there was significant speculation in the Italian press that the capital raise was not going well as third party investors were uncomfortable to allocate funds to a bank whose history of failure and unprecedented bad NPL book remained a daunting obstacle. The reason why Monte Paschi was forced to seek a private sector bailout is that Germany had repeatedly shut down Italian PM Matteo Renzi’s attempts to pursue a public sector bailout. Instead, the Germans demanded that instead of a public sector bailout the bank should implement a bail-in, and impair various liabilities, which however could result in another bout of public anger, due to the substantial retail investment in the bank’s unsecured bonds, perhaps culminating with a run on the bank.

In any case, there was little news about BMPS’ ongoing bailout plan, and now we know why: according to Reuters, European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, although Rome – as expected – would strongly resist such a move if bondholders suffered losses. Making matters worse, in the first half of 2016 much of the public’s attention had focused on the infamously unstable Italian banks, of which Monte Paschi was the weakest link, and as such the reemergence of solvency concerns involving the Italian lender could potentially reignite fears about the broader banking sector even as the Italian referendum due sometime in late October or November, gets closer.

…click on the above link to read the rest of the article…

George Friedman: Italy Is the Mother of All Systemic Threats

George Friedman: Italy Is the Mother of All Systemic Threats

Italy has been in a crisis for at least eight months, though mainstream media did not recognize it until July. This crisis has nothing to do with Brexit, although opponents of Brexit will claim it does. Even if Britain had voted to stay in the EU, the Italian crisis would still have been gathering speed.

The high level of non-performing loans (NPLs) has been a problem since before Brexit. It is clear that there is nothing in the Italian economy that can reduce them. Only a dramatic improvement in the economy would make it possible to repay these loans. And Europe’s economy cannot improve drastically enough to help. We have been in crisis for quite a while.

Banks were simply carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that only hid the obvious. As much as 17 percent of Italy’s loans will not be repaid. This will crush Italian banks’ balance sheets. And this will not only be in Italy.

Italian loans are packaged and resold, and Italian banks take loans from other European banks. These banks in turn have borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.

Bail-Ins, Not Bail Outs

The only way to help is a government bailout. The problem is that Italy is not only part of the EU, but part of the eurozone. As such, its ability to print its way out of the crisis is limited. In addition, EU regulations make it difficult for governments to bail out banks.

The EU has a concept called a bail-in, which means the depositors and creditors to the bank will lose their money.

…click on the above link to read the rest of the article…

A Look Inside Europe’s Next Crisis: Why Everyone Is Finally Panicking About Italian Banks

A Look Inside Europe’s Next Crisis: Why Everyone Is Finally Panicking About Italian Banks

Back in May 2013, we wrote an article titled “Europe’s EUR 500 Billion Ticking NPL Time Bomb” in which we laid out very simply what the biggest danger facing European banks was: non-performing, or bad, loans.

We further said, that “Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

The conclusion was likewise simple:

The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time – the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks.”

Now, three years later, the bomb appears to be on the verge of going off (or may have already quietly exploded), and nowhere is it more clear than in an exhaustive article written by the WSJ in which it focuses on Italy’s insolvent banking system, and blames – what else – the hundreds of billions in NPLs on bank books as the culprit behind Europe’s latest upcoming crisis.

…click on the above link to read the rest of the article…

Italy Seeks “Last Resort” Bailout Fund To “Ringfence” Troubled Banks, Meeting Monday

Italy Seeks “Last Resort” Bailout Fund To “Ringfence” Troubled Banks, Meeting Monday

Italy’s finance minister, Pier Carlo Padoan, wants to “ringfence” its troubled banks.

Padoan called a meeting of the executives of Italy’s troubled banks in Rome on Monday. The banks allegedly will come up with a “Last Resort” bailout fund.

Last resort or first resort, is there a difference at this point in time?

Please consider Italy Pushes for Bank Rescue Fund. I highlight the key buzzwords and phrases italics.

Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.

Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.

Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.

The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.

Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders.

A second vehicle will seek to buy non-performing loans at market prices.

“It is a backstop fund,” said one person involved in the talks.

…click on the above link to read the rest of the article…

Caught On Tape: “Enormous Crowds” Of Unemployed Chinese Miners Take To The Streets, Clash With Riot Police

Caught On Tape: “Enormous Crowds” Of Unemployed Chinese Miners Take To The Streets, Clash With Riot Police

In early November, we said that far from the traditional risk factors affecting China’s economy, including the slowing economy, the stock market (and now housing 2.0) bubble, the soaring NPLs, and record debt, the most under-reported risk facing China is the “breakdown in recent “agreeable” labor conditions, wage cuts and rising unemployment, leading to labor strikes and in some cases, violence.”

Some recent articles probing the severity of China’s collapsing labor market were the following:

A clear indication of this was the exponential rise in labor strikes on the mainland as tracked by the China Labor Bulletin:

While so far most Chinese worker strikes had been largely peaceful, two weeks ago we said it was only a matter of time before these turned violent after Reuters reported that “China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution.”

All this changed overnight when as AFP reports, thousands of miners in China’s coal-rich (or poor depending on one’s perspective) north have gone on strike over months of unpaid wages and fears that government calls to restructure their state-owned employer will lead to mass layoffs.

Citing the video shown below, AFP reported that thousands of protesters were marching through the streets of Shuangyashan city in Heilongjiang province, venting their frustration at Longmay Mining Holding Group, the biggest coal firm in northeast China. Pictures showed enormous crowds filling the streets.

…click on the above link to read the rest of the article…

 

China Proposes Unprecedented Nationalization Of Insolvent Companies: Banks Will Equitize Non-Performing Loans

China Proposes Unprecedented Nationalization Of Insolvent Companies: Banks Will Equitize Non-Performing Loans

In what may be the biggest news of the day, and certainly with far greater implications than whatever Mario Draghi will announce in a few hours when we will again witness the ECB doing not “whatever it takes” but “whatever it can do”, moments ago Reuters reported that China is preparing for an unprecedented overhaul in how it treats it trillions in non-performing loans.

Recall that as we first wrote last summer, and as subsequently Kyle Bass made it the centerpiece of his “short Yuan” investment thesis, the “neutron bomb” in the heart of China’s impaired financial system is the trillions – officially at $614 billion but realistically anywhere between 8% and 20% of China’s total $35 trillion in bank assets – in non-performing loans. It is the unknown treatment of these NPLs that has been the greatest threat to China’s just as vast deposit base amounting to well over $20 trillion, which has been the fundamental catalyst behind China’s record capital flight as depositors have been eager to move their savings as far from China’s domestic banks as possible.

As a result, conventional thinking such as that proposed by Bass, Ray Dalio, KKR and many others, speculated that China will have to devalue its currency in order to inflate away what is fundamentally an excess debt problem as the alternative is unleashing a massive debt default tsunami and “admitting” to the world just how insolvent China’s state-owned banks truly are, not to mention leading to the layoffs of tens of millions of workers by these zombie companies.

However, China now appears to be taking a surprisingly different track, and according to a Reuters report China’s central bank is preparing regulations that would allow commercial banks to swap non-performing loans of companies for stakes in those firms. Reuters sources said the release of a new document explaining the regulatory change was imminent.

…click on the above link to read the rest of the article…

Will Italian banks spark another financial crisis?

Will Italian banks spark another financial crisis?

Will Italian banks spark another financial crisis?

In the 14th century, the Medici family of Florence began its rise to prominence, investing profits from a thriving textile trade to fund what would become the largest banking institution in Europe.  The success of the legendary banking family helped to usher in the Italian Renaissance and thus change the world. Now, Italian banks seem poised to alter the world yet again.

Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore.  Amid all of the risks facing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.

At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending.  This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP.  Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.

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The red flags initially attracted the attention of the European Central Bank (ECB), prompting an official inquiry that investors viewed as a flashing ‘sell signal.’  Shares of Italian banking companies lost more than 25% in the first several weeks of the year.

Though markets have pared losses in the last few weeks, March has brought renewed concern for the health of Italy’s financial sector.  Adding more worries to fuel the fire, on Friday the ECB demanded that one such troubled Italian bank, Banca Carige SpA, provide new strategic plans and additional funding in order to bolster its balance sheet and meet supervisory requirements by the end of the month.  The news sent bank shares on yet another swoon, prompting trading halts on several as the volatility triggered maximum loss ‘circuit breakers.’

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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