Ahead of Modi’s meet with bank chiefs, RBI highlights rot within the system

Mumbai,Dinesh Unnikrishnan(FP): The central theme of the financial stability report released by the Reserve Bank of India (RBI) on Monday is the fair warning it offered to the government regarding the status of weak balance sheets of public banks, which could further worsen if economic recovery gets delayed further.


The warning, which has come just days ahead of Prime Minister Narendra Modi’s meeting with chiefs of state-run banks to discuss reforms in the public sector banking industry, foresees more pain for these entities from sticky assets.
Here is how things stand: Total stressed advances of banking system increased to 10.7 percent of the total advances from 10 percent between March and September 2014.

Of this, public-sector banks continued to record the highest level of stressed advances at 12.9 percent of their total advances in September 2014 followed by private sector banks at 4.4 percent. Clearly, state-run banks stand to lose if things do not improve from this point.

Stressed assets comprised both the bad loans and restructured advances. Total gross NPAs until September stood at Rs 2.7 lakh crore and rejigged loans another Rs 2.6 lakh crore under the corporate debt restructuring mechanism alone. In both categories, over 90 percent of the exposure is with government banks.

ReutersIf the recovery fails to materialise, gross NPAs could rise to 6.3% by March 2016 from 4.5% now, the has RBI noted. Reuters
If the recovery fails to materialise, gross NPAs of banks could rise to 6.3 percent by March 2016 from 4.5 percent now, the RBI notes. “Under such a severe stress scenario, the system level CRAR (capital to risk weighted asset ratio) of SCBs (scheduled commercial banks) could decline to 9.8 percent by March 2016 from 12.8 percent in September 2014,” the RBI said in the report.

Among the large banks with highest gross NPA level in the banking system includes United Bank of India (10.78 percent), Indian Overseas Bank (7.35 percent), central bank (6.14 percent), Andhra Bank (5.99 percent), among others. Why state-run banks always fall victim to the NPA issue? Reasons are quite simple and obvious.

To begin with, they control over 70 percent of the total banking system of the country in terms of assets. Two, all sorts of risky lending — to the agriculture, infrastructure and power sectors to name a few — are done by only the sarkari banks. Infrastructure and power are among the riskier assets for the banking system.

Private and foreign banks typically stay away from high-risk lending and focus primarily on low-risk retail lending, short-term working capital for top rated firms and, thus, keep their books clean. Unfortunately, state-run banks do not have the luxury to do so since they do not have operational autonomy.

The functioning of state-run banks depends a lot on the endless missives generated from the government bureaucrats and politicians. These banks, time and again, are used by central and state governments to run their populist agenda ranging from interested party lending to farm debt waivers.

Second, the short-life of executives at the top positions of state-run banks ensures that there is no continuity in the business policies of a bank. Long-term vision is absent to establish the quality of business growth. Every chairman focuses merely on the quantity of business to show good growth during his term. He is typically not bothered about what happens in the bank after he leaves office.

Third, lack of autonomy in operations and fear of future prospects make every public sector banker vulnerable to the unholy nexus of politicians and businessmen. Many a times, prudential norms are overlooked and the art of careless lending is exercised to favor one party or other.

High bad loans in state-run banks would also mean that rising capital burden for government, who is the majority owner in these banks. For every rupee loan that turns bad, banks need to set aside money in the form of provisions, which impacts their profitability and capital requirements. Banks also need capital to conform to the Basel-III norms.

Until the time government refuses to pare stake in these entities and let these entities become private to compete in the market, the government cannot escape from the responsibility of feeding these banks.

With the annual capital infusion in state-run banks being just a fraction of what they actually need, a fiscally constrained government will have to struggle to meet the requirements of banks it own.

The short message of the RBI’s financial stability report to the government is this: If the economic recovery doesn’t materialise as expected, prepare for much bigger crisis at state-run banks than what it envisages now.

As Firstpost had noted earlier, delay in economic recovery has already begun to reflect on the balance sheets of banks as companies are unable to recover even after banks offered loan recasts facility.

Despite the loan restructuring facility provided by banks to troubled companies, not a single company has managed to successfully exit from the CDR mechanism in the last six months. On the contrary, the bad loan pile has only grown bigger.

The government can mitigate the risks by beginning to lower stakes in public banks now enabling them raise capital. At a later stage, it can gradually move towards fully privatising these entities.

Until the time government handholds these banks and micromanages them, it is unlikely that state-run banks will see any major change in the way they operate.

Posted by on December 30, 2014. Filed under Nation. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.