Gopal Maheshwari’s Post

VPBank: Non-Performing Loans to Peak in Q3, Banking Stocks Present Attractive Opportunities https://ift.tt/xwplE2O Credit growth in the first half of 2024 reached 6.1%, equivalent to 41% of the government’s target of 15%. In the second half of 2024, to achieve the goal, the economy needs to push an additional 8.73%, equivalent to 1,184,995 billion. Banks with high credit growth in the first half were wholesale banks such as LPB and TCB, and retail banks with strengths in the southern region such as ACB and HDB. In the updated report on the banking industry outlook, VPBankS believes that credit growth of 14-15% per year is a significant challenge due to Vietnam’s credit/GDP ratio being too high. Moreover, when credit growth is considered a criterion for evaluating banks as a basis for assigning credit room for the following year, it will also indirectly cause banks to try to push the credit limit. When growth has to be compromised by asset quality, that growth is unsustainable and can lead to economic instability, high inflationary pressures, and problematic bad debt issues. Vietnam is approaching the level of developed countries such as Australia, China, and Thailand, and is still much higher than countries with similar economies such as Indonesia and the Philippines. In terms of NIM, VPBankS expects NIM to recover but not reach the peak of 2022. With the cost of capital already reduced to the COVID period due to low deposit interest rates and CASA growing again. CASA still belongs to banks with a large advantage in corporate customers such as MBB, TCB, and VCB. Banks are racing to payment products to gain the main payment account position of customers, for example, VPB has VPPay and Tap2Phone products; MBB has Miniapp and Biz MBBank products; TCB has CD Bao Loc product. NIM is supported by this trend, and the projected NIM for the entire industry in 2024 will reach 3.75%, higher than the current 24 bps, but it is also not expected that NIM will recover to the peak of 2022 due to fierce competition among banks. about prices to gain market share and expand the customer base, expand the credit institution. NIM is still higher at retail banks such as VPB, HDB, MBB, TCB, and VIB. When the market recovers, the NIM growth rate of these banks also grows faster than the industry, except for MBB and VIB due to diversification into the corporate segment. Fig. 1: Illustrative image However, bad debt remains the biggest risk. Provisioning costs are expected to increase compared to 2023 due to the industry’s bad debt still on the rise. This will affect the overall business results as the bad debt recovery situation has not seen much positive improvement, especially the bad debt originating from SCB. By the end of Q2/2024, the industry’s NPL ratio was at 4.56%, up 8.6% from the beginning of the year, but if the bad debt of the 5 credit institutions under special control is peeled off, the on-balance sheet bad debt ratio is still below 3%. The NP...

CO-LENDING BY BANKS AND NBFCs TO PRIORITY SECTOR offers win win situation. RBI vide Circular no. RBI/2020-21/63 (FIDD.CO.Plan.BC.No.8/04.09.01/2020-21 dated 05.11.2020) have issued guidelines on “Co-Lending Model” (CLM) by Banks and NBFCs. The objective is to improve the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from Banks and greater reach of the NBFCs. In terms of the Co-lending Model (CLM), Bank is permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement, named as Master Agreement (MA). The MA to be entered between the two shall inter-alia include, terms and conditions of the arrangement, the specific product lines and areas of operation, along with provisions related to segregation of responsibilities as well as customer interface and protection issues. NBFCs is required to retain a minimum of 20 per cent share of the individual loans on their books under Co-lending framework. The banks can claim priority sector status in respect of their share of credit while engaging in the CLM. A. Objective and Mutual Benefit of Co-lending by Banks and NBFCs Ø Creation of New Loan Book: The reach of the NBFCs among the local population helps them to assess their financial needs and can help in increasing the Bank’s loan portfolio in these areas. NBFCs has the ability to originate fresh loans in different loan categories in all segments for creation of priority sector assets as per a prior master agreement with the Bank. Ø Support in Follow-up & Recovery: NBFCs has the capability and resources to provide support in post sanction follow-up and recovery. It helps in increasing the Bank’s reach and business without increasing pressure on their branches, while keeping operating costs down. Ø Lower NPA Rates: With strong and effective recovery mechanism, NBFCs usually have low levels of NPAs for activities where the Banks have traditionally struggled with relatively higher NPAs in small ticket size loans. Ø Priority Sector Lending: This Co-lending arrangement is meant to co-lend loans for the exclusive creation of priority sector assets. The co-lending of loans enable the Bank to meet the PSL requirements in a convenient and more organised manner by sharing risks and rewards between the NBFCs and the Bank. Priority sector lending will be as defined by the extant RBI guidelines in force. B. Other Operational Aspects as per RBI Guidelines The co-lending Banks and NBFCs shall maintain each individual borrower’s account for their respective exposures. However, all transactions (disbursements/ repayments) between the banks and NBFCs relating to CLM shall be routed through an escrow account maintained with the banks, in order to avoid inter-mingling of funds. The co-lenders shall establish a framework for monitoring and recovery of the loan, as mutually agreed upon.

Sources of Funding: Bank Lending: Banks typically rely on customer deposits, central bank reserves, and interbank borrowing. Alternative Lending: Alternative lenders often use peer-to-peer platforms, institutional investors, or individual investors for funding. Regulatory Environment: Bank Lending: Banks are heavily regulated by central banks and government agencies. Alternative Lending: Regulations for alternative lenders are typically less stringent. Lending Criteria: Bank Lending: Banks have strict criteria, including credit scores and income verification. Alternative Lending: Alternative lenders may consider alternative data sources and have more flexible criteria. Speed and Convenience: Bank Lending: Bank loan processes can be slow and bureaucratic. Alternative Lending: Alternative lenders offer faster and more convenient application processes, often online. Flexibility and Innovation: Bank Lending: Banks have standardized products and underwriting criteria. Alternative Lending: Alternative lenders offer more customized products and may be more innovative. Risk and Return: Bank Lending: Banks focus on low-risk lending, offering lower interest rates. Alternative Lending: Alternative lending involves higher risk and may have higher interest rates. In summary, alternative lending and bank lending differ in funding sources, regulation, lending criteria, speed, flexibility, and risk-return profiles. Alternative lending offers greater flexibility and innovation, while bank lending is characterized by stability and lower risk.

Banking 101 & Evolution of Private Credit: Recently, there is a narrative that has been going around that private credit may be adding risk to markets and investors, alike. This narrative is curious at best given what I see daily. Banks and Private Credit managers have a wonderful relationship, at least from my perspective as Marathon Asset Management has long enjoyed the rewarding business we do together, partnering, trading, capital markets, and more. Having said this, bank regulations have become more restrictive over the years as Basel 3 (post GFC) and Basel 3 Endgame (2025) has cracked open the door for corporate direct lending and asset-based lending, respectively. Below is a bar chart that shows the friendly competition between the BSL and Private Credit markets as issuers have choices to tap the PC market when BSL market conditions become more difficult, and vice versa. It is important to recognize that banks lose 3 key sources of income with PC’s growth: 1. Underwriting fees to place the loan (~1 point) 2. CLO underwriting fees since 70% of the BSL market is sold to CLO managers who places the loan on a bank warehouse line, with the same bank earning a fee to structure/underwrite/place the deal 3. Direct relationship with the borrower as the bank is disintermediated by PC - potentially impacting higher margin business (M&A) Prominent bankers who claim that the expansion of private credit may lead to bubbles, systemic risk, or put unknowing investors at risk are simply attemptign to re-capture market share. Whether the loan is on the balance sheet of the bank or extended by a PC manager, there is no doubt that PC brings competition to the marketplace which is healthy for the capital markets at large as Private Equity and companies have a choice. Borrowers and lenders appreciate that the extension of credit is vital to a vibrant and well-functioning economy. When banks pulled back their lending reins as bank failures led to a significant tightening of financial conditions post-GFC, PC evolved, raised capital from savvy institutional investor who recognized the opportunity to make attractive returns by providing loans to credit-worthy borrowers. Likewise, when financial conditions tightened as the Fed increased SOFR +500bps when 3 regional banks with Assets >$100B were seized by regulators, PC again stepped up and extended credit to worthy borrowers. PC undoubtedly adds choice and stability to financial markets as a reliable lender of last resort - derisking the entire banking system - especially when banks take a conservative position in times of stress. Banks undoubtedly will always serve a vital function, and I am glad that policy works, regulators and banks are the open dialogue about the huge benefits of private credit is important and positive. It’s wonderful to note the quality of performance Private Credit has delivered, generating alpha and absolute returns in excess of liquid fixed income and public credit markets.

what does a bank do in a simplified way

I have been Banker for a decade. Here are things you should know about banking: - A banks balance sheet is opposite of usual corporate balance sheet. When a corporate places a deposit with bank, It’s asset for them but it’s liability for the bank. Similarly it’s vice versa for loan. - One of the most tricky thing in Banking is Asset-Liablity management. See a bank borrows short term (customer deposit) and lends long term (loans) which exposes their balance sheet to huge asset liability mismatch. - This means if all bank customers withdraw their money at the same time, Every bank in the world will default. They’ll go bust. This happened with Yes bank earlier and recently with SVB. - But it doesn’t happen that way. Not all customer withdraw their money at the same time (except in crisis situation). Hence bank step aside 20-25% of their money and invest in liquid asset which can be sold immediately to meet any customer withdrawals and lends only the balance. - This 20-25% keeps changing and is regulatory prescribed. It is called Cash reserve Ratio and Statutory Liquidity Ratio i.e. CRR and SLR Currently SLR is 18% and CRR is 4.5% - Banks has 3 primary sources of Revenue. Interest income, Fees income and Treasury Income. Interest income is from loan and investments. Fees incomes are in the form of commission, Processing charges etc. while Treasury income is from treasury services. - In general, Across banking : Interest income constitute 65-75% of the revenue, Fees income 25-30% and Treasury income balance 5-10% - How Interest income is calculated: Rate at which loans are given to customer (-) Rate at which bank borrows or accepts deposit ) * Total size of loan book - There are 3 ways in which bank accept deposit. Current account, Savings account, and Fixed deposit. CA being cheapest sources of funds, followed by SA and FD. Hence every bank track a key metric very closely i.e. CASA Ratio which is higher the better. - For a bank the most important thing is to maintain a lower deposit rate and still be able to mobilise (attract) customer deposit. Understand the banks dichotomy : If they give lower rate to customer, customer will shift deposit to another bank. If they give higher rate to customer, Their net interest income will reduce. Hence ability to maintain that balance is very important - Banks are into lending business and In any lending business growing too fast comes with a cost. When any lender tries to grow fast they need to increase their loan book size + Loan spread. This inadvertently pulls bad borrower i.e. customer with low credit profile. Balance between growth and book quality is very tricky and another most important thing in banking. Hope this helps in understanding some of the banking nuances. #banking #finance

New Post: How Does The Bank Make A Profit? - In the complex landscape of finance, banks play a pivotal role in facilitating economic growth by providing a multitude of services. However, have you ever wondered how these financial institutions actually make a profit? In this comprehensive guide, we’ll delve into the intricacies of the banking industry, exploring the various avenues through which banks generate revenue. Understanding the basics: To comprehend how a bank turns a profit, it’s essential to grasp the fundamental principles of banking operations. At its core, a bank acts as an intermediary between depositors and borrowers. When you deposit money into a bank, it doesn’t sit idly in a vault; instead, the bank utilizes these funds to extend loans and invest in various financial instruments. Key revenue streams: Interest income: One of the primary ways banks generate revenue is through interest income. When a bank lends money to businesses, individuals, or even other financial institutions, it charges interest on these loans. The interest earned on loans constitutes a significant portion of a bank’s income. Fee-based services: Beyond interest, banks offer an array of services for which they charge fees. These services include account maintenance fees, ATM fees, wire transfer fees, and more. By diversifying their service offerings, banks can tap into additional revenue streams. Investment activities: Banks engage in various investment activities to boost their profits. This may involve purchasing government securities, stocks, or other financial instruments. Profits from these investments contribute to the overall financial health of the bank. Foreign exchange and trading: Globalization has led to an increase in international trade and financial transactions. Banks capitalize on this by offering foreign exchange services and engaging in trading activities, where they can earn profits from fluctuations in currency and asset values. Risk management: While banks pursue these revenue streams, it’s crucial to acknowledge the risks involved. The financial landscape is inherently volatile, and banks must navigate these uncertainties. They employ risk management strategies to mitigate potential losses and safeguard their profitability. Credit risk: Banks face credit risk when borrowers fail to repay their loans. Robust credit assessment processes and collateral requirements are implemented to minimize the impact of default. Market risk: Fluctuations in interest rates, currency values, and market conditions can impact a bank’s investment portfolio. To counter market risk, banks employ hedging strategies and diversify their investment portfolios. Operational risk: Operational risks arise from internal processes, systems, and external events. Banks implement stringent internal controls and employ advanced technologies to mitigate operational risks. Adapting to technological advances: In the modern era, technology plays a pivotal role in r

🌐 Navigating the Interest Rate Shift: Implications for Bank Lending 💡 The recent interest rate shift has been a hot topic in financial circles. As rates gradually climb, banks are recalibrating their strategies to adapt. Let’s delve into the implications for bank lending! ⬅️ The past few years have been characterized by a period of low interest rates. The youngest financial crisis led to trust issues in the interbank market. To restore the liquidity and to revive the economy as well as credit lending, the ECB conducted several conventional and unconventional measures. The result was a long phase of low interest rates on the short and long end of the yield curve. This had a significant impact on the profitability of financial institutions. ➡️ The main refinancing rate has hit its low point in March 2016 and is increasing since then with several impacts on banks and credit lending. Generally, the actual effects are dependent on factors such as the economic situation, the monetary policy, the specific business models as well as the risk management practices of the individual banks. 📈 Higher Margins, But Challenges Ahead: - Interest Rate Hike: The past year witnessed a gradual increase in interest rates, benefiting banks’ net interest margins. However, this trend may not be sustainable in the long term. - Lending Opportunities: Some banks capitalized on higher rates, resulting in improved profitability. Yet, the real challenge lies in maintaining these margins as competition intensifies and sight deposits could rise in the near future as a result of regroupings to time deposits. 🏦 Credit Standards and Risk Management: - Tightened Credit Standards: Banks responded to rising credit risks by tightening lending standards. This cautious approach aims to mitigate potential loan defaults. - Resilience Building: Robust capitalization and prudent risk management are essential. Banks must strike a balance between growth and risk containment. 🏠 Real Estate Market Dynamics: - Property Valuations: The interest rate shift impacted property prices negatively, leading to reevaluations. Commercial real estate, in particular, faces heightened risks due to short-term interest rate resets. - Residential Mortgages: Stable employment conditions and fixed-rate mortgages provide some insulation, but vigilance is crucial. 🌐 Digital Transformation and Cybersecurity: - Investing in IT Infrastructure: To enhance resilience, banks must allocate resources to fortify their IT systems. Cybersecurity threats are ever-present, and preparedness is non-negotiable. - Customer Experience: Amid rate fluctuations, seamless digital experiences can differentiate banks and retain clients. 💡 Conclusion: The interest rate turnaround presents both opportunities and challenges for banks. As we navigate this landscape, prudent risk management, innovation, and customer-centricity will be our compass. #lending #interest #advisoriftc

Hugh McCulloch's 1863 Banker's Advice: 14 Timeless Principles of Prudential Banking Guidelines In 1863, Hugh McCulloch penned a circular letter to nationwide banks, offering advice and guidance on various banking and financial matters. The excerpts from letter McCulloch's letter are outlined below: 1. Distribute Loans: Avoid concentrating loans in a few hands to mitigate risk and promote financial stability. 2. Limit Large Loans:While occasionally necessary, large loans to single individuals or firms can be risky and should be approached judiciously. 3.Beware of Large Borrowers:Be cautious of large borrowers who may exert undue influence over the bank, as this dynamic can lead to adverse outcomes. 4. Loan Management:Every dollar loaned beyond the bank's capital represents an obligation, underscoring the importance of diligent loan management to safeguard the interests of depositors and stockholders. 5. Discourage Speculation:Refrain from facilitating speculative activities that could undermine financial stability. 6.Promote Prudent Transactions: Provide support only for legitimate and prudent transactions to uphold the integrity of the banking system. 7. Exercise Caution:When in doubt about a loan's propriety, err on the side of caution and decline it to protect the bank's interests. 8. Trustworthiness of Customers: Maintain trust by promptly addressing any concerns about a customer's integrity, including the option to close their account if necessary. 9.Avoid Dealing with Dishonest Individuals:Refrain from engaging with individuals of questionable integrity, as the risks often outweigh potential profits. 10. Fair Compensation:Ensure bank officers receive fair compensation to deter unethical behavior and maintain a culture of integrity. 11.Financial Discipline:Dismiss officers who live beyond their means, as financial discipline is essential for responsible banking. 12.Capital Adequacy:Ensure the bank's capital is substantial and genuine, serving as a solid foundation for its operations. 13.Uphold Integrity: Conduct business in a straightforward, upright manner to build trust and credibility with customers and stakeholders. 14.Avoid Excessive Risk-Taking: Refrain from engaging in speculative or overly risky financial activities, as they often lead to negative consequences. Application of McCulloch's Advice in Modern Banking: McCulloch's principles remain relevant in today's banking landscape, emphasizing the importance of sound banking practices, quality lending, liquidity management, diversification, and honesty. By adhering to these principles, banks can prioritize stability, risk management, and responsible lending, ensuring their long-term viability and fostering trust with customers and stakeholders. Link: https://lnkd.in/eA-eeM36

The regulation of interbank lending rates The regulation of interbank lending rates by the Central bank can significantly impact the cost of credit in Kenya. Interbank lending rates refer to the interest rates at which banks lend to each other in the interbank market. These rates are crucial for maintaining liquidity and managing short-term funding needs. Banks with excess funds lend to other banks that need liquidity. Conversely, when banks face a shortage of funds, they borrow from other banks. The interbank market facilitates risk-sharing and liquidity transfer among banks. Impact on Cost of Credit The regulation of interbank lending rates can influence the overall cost of credit in several ways as highlighted below Liquidity Provision: By regulating interbank rates, the Central Bank of Kenya can ensure sufficient liquidity in the banking system. When liquidity is abundant, banks can meet their funding needs without resorting to expensive sources of financing. Lowering Borrowing Costs: When interbank rates are well-regulated and stable, banks can borrow from each other at reasonable rates. Lower borrowing costs for banks translate into lower costs for borrowers (individuals, businesses, and corporations). Transmission Mechanism: Changes in interbank rates affect other interest rates in the economy e.g. Prime Lending Rate: Commercial banks often set their prime lending rates based on interbank rates. A reduction in interbank rates can lead to a decrease in the prime lending rate, making loans more affordable for borrowers. Consumer Loans: When banks pay less to borrow from each other, they can pass on these savings to consumers by offering lower interest rates on personal loans, mortgages, and other credit products. Business Loans: Similarly, businesses benefit from reduced borrowing costs, which can stimulate investment and economic growth. Risk Management: Regulated interbank rates contribute to better risk management. Banks can plan their liquidity needs more effectively, reducing the likelihood of liquidity shortages or excessive borrowing during financial stress. Stability: Stable interbank rates create a predictable environment for banks and borrowers. This stability encourages long-term planning and investment. The Central Bank has implemented reforms to regulate interbank rates: Lowering Rates: The interbank lending rates are expected to stay under 1.5% of the prevailing Central Bank Rate (CBR), down from 2.5%. In Addition, the discount window rate (used as a last resort for banks) has been lowered to three percent above the CBR. These reforms aim to enhance liquidity provision, reduce borrowing costs, and promote stability in the financial system.