Caught in a cleft [ Public Sector Banks ]| Business Standard Editorials–13.09.2017

Reserve Bank of India Deputy Governor Viral Acharya said last week that the financial health of India’s public sector banks (PSBs) was so poor that it kept him awake at night. It is not that the government and the central bank have not tried to tackle the problems, but Mr Acharya said that the “glacial” pace of reforms was worrying. For instance, he said while the so-called Indradhanush was a good plan, it might not be enough and what the PSBs needed was a far more powerful Sudarshan Chakra (the name of Krishna’s weapon) that could do things quickly to save these banks, most of which had gross non-performing assets (NPAs) in excess of their net worth.

The problem is while there is a near-consensus that something needs to be done quickly, there seems to be no solution in sight to fix the problems the PSBs face with their stressed balance sheets. For the first time in at least two decades, the loan books of the PSBs shrank as advances fell by Rs 1.35 lakh crore in 2016-17. This is not surprising since weak balance sheets cannot support healthy credit growth. Far from kick-starting growth, Indian PSBs actually need capital to merely survive.
According to the latest data from Fitch Ratings, Indian banks require around $65 billion of additional capital to meet the new Basel III capital standards that will be in place by the end of March 2019, and the PSBs need around 95 per cent of this estimated amount.
As against this requirement, the government has only committed to investing around $3 billion in fresh equity for 21 PSBs over 2017-18 and 2018-19. Clearly, the government is in no position to supply the capital to kick-start the PSBs.
The key question is how will recapitalisation happen? Mr Acharya said that the Cabinet Committee on Economic Affairs had authorised an alternative mechanism to bring down the government’s stake in the PSBs to 52 per cent. But this is not a practical solution given the political compulsions as well as the big question of lack of investor appetite in taking exposure in weak banks. The Union Cabinet has also been pushing for mergers but as the case with the State Bank of India shows, mergers are no guarantees for turnarounds. In fact, they may run aground the banks that were performing well. Also, most PSBs have exposure to the same set of stressed assets and a merged entity might end up with a larger exposure to stressed sectors.
There is no denying that over the past few years, the RBI and the government have done a lot to resolve the bad loans situation. Starting with the creation of the Central Repository of Information on Large Credits (CRILC) in early 2014 and the initiation of Asset Quality Review (AQR) from April 1, 2015, a process has been put in place to make banks provide for non-performing assets. The enactment of the Insolvency and Bankruptcy Code (IBC) in December 2016 then plugged a massive regulatory gap and should in time provide for a quicker resolution of NPAs. But some of the recent court verdicts in insolvency cases may queer the pitch.
One possible way out that the government and PSB boards should consider seriously is selling off or divesting stakes in subsidiaries and non-core businesses so that the money raised can be ploughed into their core operations. There is much to learn from PSBs, which have reduced their stakes in their insurance ventures.

via Caught in a cleft | Business Standard Editorials

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