Large Scale Capital Infusion: Cure for PSU Banks (PSBs)....

Photo: UCO Bank

The banking sector, which is laden with bad loans, plays a critical role in carrying out the government's development agenda but unfortunately hereto precious little has being done to revive this space.

A recent study found that the gross “non-performing assets” of state banks rose 56% in 2016, and 135% in the last two years. They now account for 11% of all state bank loans.

These are hardly reassuring figures. Yet the Narendra Modi's government—which, after all, owns these banks and thus dominates the Indian financial sector— seens relatively unconcerned. In the most recent budget, the government set aside barely $1.5 billion to recapitalize the banks.

You must have read that off late there were some capital infusion in 10 banks by the government of India. The name of the banks and the amount of capital to be infused by the government are:

Allahabad Bank (Rs.418 cr), Andhra Bank (Rs.1,100 cr), Bank of India (Rs.1,500 cr), Bank of Maharashtra (Rs.300 cr), Central Bank of India (Rs.100 cr), Dena Bank (Rs.600 cr), IDBI Bank (Rs.1,900 cr), Indian Overseas Bank (Rs.1,100 cr), UCO Bank (Rs.1,150 cr), and United Bank of India (Rs.418 cr).

However, Large-scale capital infusion in individual banks, consolidation or culling or even creation of a bad bank is the need of the hour.

Or else as the negative effects of demonetisation slowly tapers down and investment demand picks up in a big way, corporate borrowers will be scrambling for credit, but the banking system will be  find hard put to support India’s growth; leading to borrowings through ECB routes or FCCBs or through PE capital or Equity.

Moreover, while India government’s demonetization exercise which forced citizens to return old high-value notes in November-December period, might have had many side effects, however it the helped banks to grow deposits. 

Also, as a percentage of total loan assets, roughly one-third of all loans of United Bank of India (33.07%) and IOB (32.63%) are stressed. For IDBI Bank, this ratio is 27.76% and Uco, 21.71%. Thus the position of UCO Bank (Rs.36) is the best among the four indebted banks.

Besides, most analysts say that the government will be able to stick to the target of a fiscal deficit of 3.5% of gross domestic product, or GDP, in the current fiscal year that ends in March and aim for at least 3.3% fiscal deficit for 2018. It is to.be noted that successive governments have been diligently lowering the fiscal deficit for several years since 2012 when the deficit touched 5.9% of GDP.

While no one can question the importance of keeping the fiscal deficit low, the FMO should also focus on smart reforms in the banking industry.

In August 2015, finance minister Arun Jaitley announced the grand Indradhanush plan—the “solution to the problems” of the industry, which Modi explored in Gyan Sangam. It promised to tackle several critical issues, including appointments, capitalization, stress in the system, empowerment, accountability and governance reforms to revamp functioning of the government-owned banks.

Estimating the capital requirement between fiscal year 2015 and 2019 at around Rs1.8 trillion, assuming 12-15% growth in bank credit, the government has committed to pump in Rs70,000 crore in phases till 2019 when the new Basel norms kick in. It also feels that the public sector banks’ (PSBs) market valuations will improve significantly following governance reforms, tight bad loan management and risk controls, significant operating improvements and, of course, capital allocation in successive budgets.

Higher valuations, coupled with sale of non-core assets as well as improvement in performance would enable these banks to raise money from the market, the government had said.

It also issued a circular that said there would be no interference from the government and the banks would be encouraged to take their decisions independently, keeping the commercial interest of the organization in mind. 

Many of the government-owned banks that have around 70% share of banking assets are laden with bad loans and need capital to stay afloat. 

But till date most part of these declarations remained in paper only. The government of the day therefore should do this task on a priority basis, before the things are too late and damage becomes irreversible. If this governmentu is as bold and courageous as it likes to claim, that should be its topmost agenda.

However, inspite  of all these negatives, the banks stocks are on a steady rise since the last few months -- may be market knows something which we do not know. Now that the BJP has improved its position further, we could see a spurt in the Bank Stocks in the near term, as banks are a proxy to any economy.