Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Not So Stable: According to the Reserve Bank of India (RBI), gross NPLS are not anticipated to be as bad as originally believed. In addition, the RBI retains its cautious outlook on MSME credit risk; and
* Rose Colored Glasses: As we have highlighted in numerous individual Indian bank notes, credit quality continued to deteriorate at an accelerated pace prior to the second wave of COVID-19. While many financials are already considered technically insolvent, the reality is that there has been absolutely no let up in the breakdown of credit quality.

*Not So Stable: According to the Reserve Bank of India (RBI), gross NPLS are not anticipated to be as bad as originally believed. In addition, the RBI retains its cautious outlook on MSME credit risk; and
* Rose Colored Glasses: As we have highlighted in numerous individual Indian bank notes, credit quality continued to deteriorate at an accelerated pace prior to the second wave of COVID-19. While many financials are already considered technically insolvent, the reality is that there has been absolutely no let up in the breakdown of credit quality.

Reserve Bank Of India – FSR Is Very Unrealistic

Specialist in Indian Banking and Economic Research

Hemindra Hazari

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">Indusind Bank</a>  and <a href="https://economictimes.indiatimes.com/prime/corporate-governance/sebi-slaps-show-cause-on-aditya-birla-finance-for-realty-loans-to-a-shell-firm-to-help-thapars/primearticleshow/83518285.cms" target="_blank" rel="noopener">Aditya Birla Finance</a> highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">norms</a> for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (<a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">here</a>) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to Standard Chartered Bank, Indusind Bank  and Aditya Birla Finance highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) norms for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (here and here) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.   

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Wrong Rule At Wrong Time

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

India was in a banking crisis before 2020 and the impact of the current crisis is far worse than in most other countries. Quarterly data of banks reveals dramatic deterioration in credit metrics during March 2021.

India was in a banking crisis before 2020 and the impact of the current crisis is far worse than in most other countries. Quarterly data of banks reveals dramatic deterioration in credit metrics during March 2021. 

India

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

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Indusind Bank (IIB IN)

Reserve Bank Of India – FSR Is Very Unrealistic

RESERVE BANK OF INDIA: According to the RBI, NPLS are not anticipated to be as bad. This couldn't be further from the truth. NPLs continue to...

Thomas J. Monaco

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as,...

Hemindra Hazari

India Financials – Plop Plop Fizz Fizz

INDIA FINANCIALS: ECLGS was launched in May 2020 to offset poor economic conditions. ECGLS has again been expanded from INR 3 tn to INR 4.5 tn....

Thomas J. Monaco

Reserve Bank of India – Wrong Rule At Wrong Time

RESERVE BANK OF INDIA: The RBI has finalized rules for NBFC dividend payout ratios at 50% - predicated on the net NPL ratio and CAR. The new...

Thomas J. Monaco

India Banks – Still In Crisis?

India was in a banking crisis before 2020 and the current crisis is worse than in many other countries. Unlike most regions, India latest quarterly...

Daniel Tabbush

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