Lenders to Contro| k|ngf|sher Larn|ngs

SanglLa MehLa
1he Lconomlc 1lmes
ubllshed on november 13 2011

8evenues Lo flow lnLo escrow accounL Lo be conLrolled by one of Lhe banks
Mumbal november 14 8anks wlll Lake conLrol of Lhe cash flow of klngflsher Alrllnes a harsh sLep
LhaL lenders rarely Lake Lo proLecL Lhelr exposure 1hey wlll puL ln place a mechanlsm where Lhe alrllne's
earnlngs wlll flow lnLo one bank accounL LhaL wlll be closely Lracked Lo averL loan defaulLs
1he declslon was Laken by Lhe lenders aL a hurrledly called meeLlng lasL week as Lhe vl[ay Mallya
promoLed alrllne hlL Lhe headllnes afLer lL cancelled 200 fllghLs and soughL governmenL help AL presenL
klngflsher operaLes slmllar accounLs beLLer known as escrow wlLh some forelgn banks LhaL are noL lLs
lenders 1he company's earnlngs are parked ln Lhese accounLs for servlclng loans and paymenL of bllls
8uL afLer Lhe recenL developmenLs lenders have lnslsLed LhaL a new escrow accounL be opened wlLh
one of Lhe lendlng banks sald a person on condlLlon of anonymlLy no declslon has been Laken on
where Lhe accounL wlll be opened buL Lhere ls some undersLandlng lClCl 8ank wlll handle Lhe cash flow
Lhrough Lhe escrow accounL 1he deLalls of Lhe arrangemenL and how Lhe accounL wlll funcLlon are yeL
Lo be worked ouL" sald a banker 1he deslgnaLed bank wlll monlLor Lhe cash flows and use lLs dlscreLlon
whlle releaslng paymenLs Lo fuel companles lenders and alrcrafL malnLenance companles 1he ldea ls
Lo rlngfence Lhe cash flow Lo avold defaulLs 1he bank managlng Lhe cash flow wlll share Lhe LransacLlon
deLalls wlLh oLher lenders so Lhere are no rlfLs among Lhe banks" sald Lhe person lndusLry clrcles Lhlnk
Lhe move may be a prelude Lo a corporaLe debL resLrucLurlng programme where lenders [olnLly declde
Lo reschedule loan repaymenLs and lessen Lhe borrower's burden
WlLh oll companles asklng Lhe debLladen alrllne Lo clear dues banks are worrled Lhe company wlll flnd
lL dlfflculL Lo pay lnLeresL on loans Accordlng Lo anoLher bank offlclal Lhe lenders have declded Lo form
a core group of flve banks LhaL wlll focus on Lhe company's flnances 1he group lncludes S8l 8ank of
lndla 8ank of 8aroda un[ab naLlonal 8ank and lClCl 8ank
1here are 13 lenders and lL's noL feaslble Lo brlng Lhem all LogeLher 1herefore a core group of lenders
ls belng formed" sald Lhe banker S8l Lhe lead lender has asked Lhe alrllne Lo brlng ln 8s 400 crore ln
fresh equlLy before any loan resLrucLurlng can be lnlLlaLed Less Lhan a year ago banks resLrucLured
close Lo 8s 7000 crore of loans Lo klngflsher Some loans were converLed lnLo equlLy and Lenures were
exLended for Lhe resL


re[ects proposa| on |eas|ng mortgaged |and

1he 1rlbune news Servlce
ubllshed on november 13 2011

Chandlgarh november 14 1he 8eserve 8ank of lndla has re[ecLed Lhe Paryana governmenL's proposal
for banks Lo manage land under lease arrangemenL ln case of defaulL ln loan repaymenL 1he scheme
forwarded by Lhe Paryana sLaLe level bankers commlLLee Lo Lhe cenLral bank has been re[ecLed by Lhe
laLLer on Lhe grounds LhaL lL would nelLher be feaslble nor vlable and would vlLlaLe Lhe credlL
aLmosphere ln Lhe sLaLe"
1hls was dlsclosed durlng Lhe sLaLe level bankers commlLLee (SL8C) meeLlng for Paryana held here
Monday 1he represenLaLlves of Lhe sLaLe governmenL and oLher publlc prlvaLe and cooperaLlve banks
were lnformed by Lhe convener bank un[ab naLlonal 8ank LhaL Lhe 88l's cenLral offlce had decllned Lo
go ahead wlLh Lhe scheme on Lhe grounds lL mlghL enLall legal compllcaLlons for banks and credlL Lo Lhe
farm secLor would be affecLed Such a scheme would cause banks' resources Lo be dlverLed from Lhelr
core acLlvlLles wlLhouL maklng any subsLanLlal galn on Lhe recovery fronL" sald Lhe 88l communlcaLlon
1he Paryana governmenL had mooLed a proposal lasL year LhaL a farmer's land held as collaLeral should
noL be aucLloned by Lhe bank 8aLher Lhe bank should manage Lhe land under lease arrangemenL
under whlch 30 lncome may be used Lo reallze Lhe dues of Lhe bank and remalnlng 30 should go Lo
Lhe farmer
ln facL Lhls scheme ls already belng lmplemenLed ln Paryana SLaLe CooperaLlve Apex 8ank and Lhe
Paryana SLaLe CooperaLlve AgrlculLure and 8ural uevelopmenL 8ank

Luropean banks and As|a

C Chandrasekhar
1he 8uslness Llne
ubllshed on november 13 2011

8anks ln Lurope are belng forced Lo Lake a halrcuL Lo deal wlLh Lhe reglons crlsls 1hls ralses concerns
abouL Lhe llkely lmpacL LhaL Lhe crlsls would have on Lhe flnanclal sysLems ln oLher reglons of Lhe world
WhaL are Lhe lmpllcaLlons for Asla?
lnlLlally Lhe sLlllevolvlng crlsls ln Lurope was read as belng Lhe resulL of excess publlc debL and poor
publlc flnances 1hough Lhls debL was owed Lo Lhe banks especlally Luropean banks Lhe laLLer were
seen as proLecLed uefaulL on debL owed Lo Lhem would damage Lhe flnanclal sysLem worsen Lhe real
economy crlsls break Lhe Lurozone and end Lhe euro
CovernmenLs LhaL had come LogeLher Lo consLlLuLe Lhe Lurozone and adopL a common euro would
hardly opL for Lhls scenarlo sLemmlng from a defaulL by Lhem LhaL could damage bank proflLablllLy
uslng LhaL argumenL Lhe flnanclal communlLy worked overLlme Lo call for acLlon LhaL would save Lhe
banks aL Lhe expense of Lhe counLrles of Lhe Lurozone and Lhelr populaLlons
lL ls now clear however LhaL Lhls sLraLegy would noL work CovernmenLs seeklng Lo ad[usL" Lhrough
ausLerlLy are flndlng Lhelr publlc flnances worsenlng raLher Lhan lmprovlng erodlng furLher Lhelr ablllLy
Lo avold a defaulL on debL commlLmenLs 1hus banks are belng requlred Lo Lake a halrcuL currenLly seL
aL 30 per cenL of loan value up from 20 per cenL a few monLhs earller 1hls could geL even hlgher
8ecaplLallsaLlon lmperaLlve
Clven Lhe damage LhaL Lhls would do Lo bank proflLs and balance sheeLs a recaplLallsaLlon of Luropean
banks ls lmperaLlve wlLh Lhe currenL overly conservaLlve esLlmaLe placlng Lhe funds requlred for LhaL
purpose aL t106 bllllon ln addlLlon wlLh Luropean regulaLors seL Lo agree on a revlsed core (Ller one)
caplLal raLlo of 9 per cenL for Lhelr banks Lhls flgure could go up Lo t273 bllllon accordlng Lo Morgan
SLanley
As of now banks are requlred Lo dlg lnLo Lhelr global reserves (lf any) approach Lhe prlvaLe markeLs for
debL and equlLy as well as Lake supporL from governmenLs Lhrough Lhe Luropean llnanclal SLablllLy
laclllLy (LlSl) 8uL wlLh mosL Luropean governmenLs unwllllng or unable Lo provlde funds Lhe LlSls
fuLure sLrengLh ls sLlll uncerLaln
1hus a slgnlflcanL reLrenchmenL of sLlll performlng asseLs by Luropean banks and perslsLlng and
posslbly worsenlng real economy crlses seem unavoldable as of now
1hls has led Lo much dlscusslon on how a Luropean banklng crlsls would affecL Lhe resL of Lhe world
Cur concern here ls wlLh Lhe lmpacL on developlng counLrles especlally Lhe developlng counLrles or Lhe
emerglng markeLs" ln Asla exposed slgnlflcanLly Lo global banks
lL ls now well accepLed LhaL one of Lhe consequences of flnanclal globallsaLlon has been Lhe lncreased
presence of global banks ln developlng counLrles and an lncrease ln Lhelr role as lenders ln Lhese
counLrles 1hls process has of course unfolded Lo dlfferenL degrees ln dlfferenL reglons of Lhe world
lorelgn Clalms
8eLween 1993 and 2003 Lhe share of forelgn banks ln LoLal bank asseLs rose from 23 Lo 38 per cenL ln
LasLern Lurope and from 18 Lo 38 per cenL ln LaLln Amerlca Lhough even by LhaL daLe Lhe lncrease ln
LasL Asla and Cceanla was much less (from 3 Lo 6 per cenL)
WlLh Lhls lncrease ln presence Lhe share of forelgn banks ln lendlng Lo nonbank resldenLs has been
rlslng Slnce Lhe mld1990s (and by 2009) Lhe share of forelgn banks ln credlL Lo nonbank resldenLs rose
from 30 Lo 30 per cenL ln LaLln Amerlca Lo nearly 90 per cenL ln emerglng Lurope buL ls sLlll aL abouL 20
per cenL ln emerglng Asla
As of Lhe end of Lhe second quarLer of 2011 banks ln counLrles reporLlng Lo Lhe 8ank of lnLernaLlonal
SeLLlemenLs (8lS) had forelgn clalms of $273 Lrllllon ouLsLandlng
1hough a domlnanL share ($201 Lrllllon) of Lhese accumulaLed clalms was ln Lhe developed counLrles
Lhe developlng counLry share ($31 Lrllllon) was by no means meagre (CharL 1)
WhaL ls parLlcularly noLeworLhy ls LhaL Lhe lnLernaLlonal banks lnvolved are predomlnanLly Luropean
Around 70 per cenL of Lhe forelgn clalms of Lhe global banklng sysLem ls on accounL of Luropean banks
CreaLer flnanclal lnLegraLlon ln Lurope ls one obvlous reason Cf Lhe $201 Lrllllon clalms on Lhe
developed counLrles $123 Lrllllon ls ln Luropean developed counLrles as compared wlLh [usL $36
Lrllllon ln Lhe uS
8uL anoLher parL of Lhe reason ls LhaL Luropean banks faced wlLh lncreased compeLlLlon aL home are
now seeklng ouL developlng counLrles Lo expand buslness and susLaln proflLablllLy
Close Lo 20 per cenL of Lhe exposure of banks abroad ls ln developlng counLrles and Lhls ls Lrue of
Luropean banks as well (1able 1)
Clven Lhe greaLer role of Luropean banks ln LoLal lnLernaLlonal fundlng and Lhe lmporLance of a few
developlng emerglng markeLs" as reclplenLs of caplLal Lhls ls of slgnlflcance
1he concenLraLlon of emerglng markeL exposure ln banks from one reglon lncreases Lhe vulnerablllLy of
boLh Lhese banks and Lhelr cllenLs
8uL as dlscussed below glven Lhe asymmeLrlc naLure of Lhe relaLlonshlp beLween forelgn banks and
Lhelr emerglng markeL cllenLs Lhls vulnerablllLy ls Lhe greaLer for Lhe laLLer especlally ln Lhe conLexL of
Lhe currenL crlsls ln Lurope
CaplLal CuLflow
ln Lhe currenL conLexL Lhe vulnerablllLy of Lhe developlng counLrles as demonsLraLed by Lhe experlence
durlng Lhe 200809 crlsls comes especlally from one source
Pavlng Lo cover losses aL home recaplLallse Lhemselves and lmprove Lhe rlsk proflle of Lhelr lendlng
Luropean banks are llkely Lo look Lo Lransferrlng proflLs and reLrenchlng asseLs ln Lhelr global
operaLlons
Lmerglng markeLs are bound Lo be affecLed by such moves Among emerglng markeLs Lhose ln Lhe
Aslaaclflc normally presenLed as relaLlvely decoupled" from Lhe developed WesL are [usL as
vulnerable As much as $18 Lrllllon of Lhe $31 Lrllllon of global banklng forelgn clalms locaLed ln
developlng counLrles are ln Lhe Aslaaclflc
1he dlsconcerLlng feaLure of Lhese clalms ls LhaL Lhey seem Lo have been drlven Lo a subsLanLlal degree
by shorLLerm supply slde developmenLs ln Lhe developed counLrles
As CharL 2 shows forelgn clalms on Lhe Aslaaclflc developlng counLrles rose by $347 bllllon durlng Lhe
perlod 20002006 when Lhere occurred a supply slde drlven surge ln caplLal flows across Lhe globe
Lven durlng Lhe crlsls perlod sLreLchlng from 2007 Lo Lhe mlddle of 2009 forelgn bank clalms ln Lhe
reglon lncreased by $290 bllllon And when Lhe posLcrlsls llquldlLy lnfuslon made avallable cheap caplLal
ln large quanLlLles Lo Lhe banklng sysLem Lhe Aslaaclflc developlng counLrles were Lhe locaLlons for an
expanslon of forelgn bank clalms Lo Lhe Lune of $396 bllllon ln [usL Lwo years
A caplLal surge of Lhls klnd LhaL provlded addlLlonal grounds for Lhe decoupllng" perspecLlve makes
Lhe reglon even more vulnerable Lo a caplLal ouLflow or a mere cuLback ln lendlng by forelgn enLlLles
Clven whaL we noLed earller Lhls vulnerablllLy ls greaLer because of Lhe lmporLance of Luropean banks
ln Lhe reglon 1he share of Luropean banks ln Lhese clalms ln Lhe developlng Aslaaclflc rose from 33 Lo
38 per cenL beLween 2000 and 2006 and has slnce fallen Lo 326 per cenL (CharL 3)
arL of Lhe reason for LhaL decllne ls Lhe facL LhaL Lhe llquldlLy lnfuslon lnLo Lhe banklng sysLem has been
far more ln Lhe uS Lhan ln Lurope ln Lhe afLermaLh of Lhe crlsls
8uL lL ls also a reflecLlon of Lhe facL LhaL Luropean banks have been Lurnlng more cauLlous and posslbly
reLrenchlng asseLs when Lhey maLure Lo Lransfer funds Lo Lhelr parenL enLlLles
1haL belng sald how lmporLanL are Lhese forelgn bank clalms Lo Lhe Aslaaclflc developlng counLrles?
lL ls lndeed Lrue LhaL ln many of Lhem Lhe annual flows of caplLal LhaL Lhose clalms represenL are small
when compared Lo Lhe aggregaLe annual flow of debL equlLy and oLher clalms
Powever as accumulaLed clalms Lhese do consLlLuLe a slgnlflcanL amounL relaLlve Lo Cu ln mosL Aslan
emerglng markeLs excludlng Chlna (1able 3)
AL 1320 per cenL ln lndla and 1halland and as much as 3030 per cenL ln korea and Malaysla Lhese
accumulaLed clalms are a source for concern Any sudden reLrenchmenL can creaLe llquldlLy as well as
forelgn exchange dlfflculLles