Banks Are Failing Again in America
It doesn’t mean the broader economy is in trouble.
Back in India We have been watching turbulence in Banking Industry due to the mounting NPA’s every year causing erosion in the soundness of health of the entire banking system. The capital adequacy ratio has declined considerably. Gross NPA’s are nearing 10 lakh crores and banks are turning red due to huge provisioning stipulated by RBI.
Insolvency and Bankruptcy code promulgated by the Parliament has remained ineffective so far as none of the 12 big accounts has shown any sign of recovery and Rs.1.75 lakh cr outstanding in these accounts from these 12 accounts remains stuck due to various loop holes in the system
The distressed assets situation in India has worsened over the last few years, with banks’ NPA levels at an all-time high. The extent of NPAs in the system is worse than those seen in Italy, Greece, and Portugal at the height of the global financial crisis of 2008-10. The annualised growth rate of NPAs over the last five years has been more than 25 percent. NPAs have been mostly concentrated in the public-sector banks. The acute stress in the public-sector banks is due to a combination of external factors, such as problems related to infrastructure projects and the global slowdown in commodity prices, and internal, such as risk mismanagement and excessive growth in lending books.
This growing stock of non-performing assets has adversely impacted the growth, profitability, and capital adequacy levels of the public-sector banks. They account for more than two-thirds of the banking sector, so their stress levels now jeopardise credit growth, which recorded its lowest levels in over 60 years in the 2017 fiscal year. India continues to be an asset-poor country, with a loan-to-GDP ratio of 52 percent, compared to 152 percent in China, 151 percent in Thailand, 134 percent in the United Kingdom, and 189 percent in the United States. While much of the impact can be attributed to a slowdown in corporate credit demand, the public-sector banks’ lower capital adequacy levels are restricting their lending capacity, reducing their lending to the retail and SME segments.
Despite all symptoms of serious illness, the state owned Banks in India manage to survive due to various constraints compelling the Government to resort to dripping through recapitalization
but banks are failing again in America.
The past several years have been relatively placid for the banking industry. After the wholesale failure of the system during the financial crisis, banks gradually recovered their footing. Aided by essentially free money from the Federal Reserve, bailouts, and widespread federal and central bank guarantees, banks once again became rock-solid American institutions. As the expansion rolled on, companies and individuals did a much better job keeping up with their financial obligations. The result: record profits for banks and an extremely low rate of bank failure.
In 2016, banks covered by the Federal Deposit Insurance Corporation showed huge profits and only a few banks failed last year. What’s more, the banks that failed were truly marginal, counting just 18 branches
But something worrisome is happening in 2017. So far this year, seven banks have already failed. More important, the banks that are failing are significantly larger. Guaranty Bank of Milwaukee bit the dust. A few months before, it was First NBC Bank of New Orleans Financial failure begets financial failure. For the first time in nearly a decade, this is what it has started to happen in US.
The U.S. economy is, by most accounts, rolling along. The current expansion is now in its 95th month. The economy has added payroll jobs for a record 79 months, and the unemployment rate is at 4.4 percent.
When expansions get longer, a few things happen. Banks, consumers, and companies all get more confident about their ability to handle debt, which leads to more credit being extended. At the same time, lenders seeking growth start to become more aggressive about putting money in the hands of people. Once all the people who can easily afford to purchase cars have taken car loans or mortgages, banks seek out more marginal borrowers in order to keep boosting their profits. And once credit gets distributed a little too widely, borrowers begin to default—even if nothing else changes in the economy or the climate for credit.
But something is changing. For the first time in a decade, the Federal Reserve is raising interest rates—thus increasing the cost of borrowing and servicing debt. Before December 2015, when the Fed boosted the federal funds rate from zero to 0.25 percent, it had been 9.5 years since the Fed last raised the interest rates it controls. The Federal Reserve has since raised rates in 0.25 percent increments twice. Yes, interest rates are still remarkably low, and the moves have been small. But it’s the direction that matters. For a decade, people in the economy had been conditioned to think that interest rates don’t really go up—and they borrowed and planned accordingly.
When interest rates were low and generally declining, people could refinance their way out of trouble. But when interest rates go up, it becomes harder to avoid trouble. And so as rates rise this deep in an economic cycle, it’s not surprising that the rate of financial failures is increasing. After hitting the lowest level since 2006 in the third quarter of 2016, mortgage delinquency rates rose in the fourth quarter to 4.8 percent. The delinquency rate on credit card loans, while still at a very low level, rose for three straight quarters in 2016. The volume of auto loans that are delinquent is rising rapidly. All these metrics will likely continue to rise.
In addition, it’s worth recalling that this recovery has been remarkably uneven. Amid the long expansions, there are always pockets of distress. So if you’ve extended credit aggressively in an area that is struggling to begin with, and interest rates start to rise, you’re likely to run into trouble quickly. Guaranty Bank, which failed in early May, lends primarily to lower- and middle-income people in urban areas, a demographic slice that hasn’t fully participated in the expansion. New Orleans’ First NBC Bank, the biggest failure so far this year, is a relatively new bank (founded 2006) that lent heavily to the oil and gas industry, which has been traumatized by persistently low prices.
None of this is to say we’re going to have a repeat of the financial crisis or there is any danger of a recession but the spate of failures should set off alarms. The forces that have helped turn the direction of delinquency rates around are still very much there. The business cycle continues to age, What’s more, a sudden increase in financial failures tends to push banks and other lenders to pull back credit and tighten lending terms—which means it will be harder for people to refinance their way out of trouble or ask for leniency.
The two biggest democracies have different perceptions and strengths to tackle the problem of growing NPA and sick financial institutions but we have seldom heard of failure of Banks in India that credits the US with more transparency and freedom for the institutions to decide future of their own. Yes the Indian system remains protective under the bigg Government umbrella