The Public Sector Banks (PSBs) are stressed and it is showing. Barring the State Bank of India and the Bank of Baroda, most Public Sector Banks have seen a decline in cash flows and a sharp increase in Non Performing Assets (NPA).
The combined NPA of 21 PSBs totals Rs 1,37,586 crore in Q4 FY’14 as compared with Rs 91,737 crore in Q4 ‘FY13, an increase of 49.97%. This is a matter of serious concern.
By the end of March 2014, Gross NPAs at Central Bank of India was 6.27%, Punjab National Bank at 5.25%, Union Bank 4.1%, Bank of India at 3.15%. The Bank of Baroda was the exception at 2.94% (down from 3.32% in FY’13). The State Bank of India also reduced their NPA by 9.13%. The RBI has been monitoring the banks closely along with other PSBs, and the new RBI Governor, Raghuram Rajan has tried to calm fears that the situation might get out of hand.
The banking system in India was nationalised in 1969 with a major role to play in India’s development. Since those days of social outreach and rural development, the Public Sector Banks (PSB) have now diversified their range of services and have been trying to keep up with the demands of a growing economy.
With the private sector banks entering the banking space and growing rapidly, the PSBs have been trying to keep pace with the private sector in terms of service range and efficiency. However, it is not a fair comparison as the PSBs operate on government guidelines and social priorities. This has led to the PSBs performing the dual role of a catalyst to social and economic development while performing the tasks of a commercial bank. The challenge has been to find the optimised zone where the two meet at peak operational efficiency.
A loan is classified as NPA if the interest or principal repayment is overdue for more than 90 days. The PSUs have rising NPAs, which are loans given with little or no chance of recovery, or recovery over an extended period that is well beyond what was envisaged. These loans are often released to meet government guidelines and policies or very often to meet political obligations on behalf of vested interests. The PSBs have been lending to the infrastructure, road building, power, mining sectors and with the slowdown in the domestic economy, the NPAs for most PSBs have predictably risen. The banks face severe pressure to improve their books, with no immediate relief in sight.
Following intervention from the RBI, the banks now have to monitor loans that are not NPAs yet but could turn NPA soon. The threshold varies between 4% and 8% of total advances. These accounts that have the potential to turn into NPAs are classified as Special Mention Accounts (SMA), where the loan repayment is overdue up to 30 days, SMA-1 where the loan repayment is overdue between 31 and 60 days. SMA-2 where the loan repayment is overdue between 61 and 90 days.
The PSBs have been clamouring for a level playing field with the private sector, and unless the PSBs are empowered to function independent of governmental control, they will continue to remain inefficient and cost-heavy.
Outgoing Deputy Governor of RBI, K.C. Chakrabarty has stated that the problem of PSBs in general was not due to interference from the government but with poor leadership and management of banks that is causing the books to be in bad shape. He was of the opinion that there was a lot of room for improvement in the internal management of the PSBs.
India is under pressure to meet Basel III Capital norms and according to estimates, the PSBs are going to require Rs 2,40,000 crore to recapitalise. That’s around 2% of the GDP and by 2016, India will have to bring down its budget deficit from 4.7% to 4.1%. Given the tight CAD situation and running inflation, this is going to be a major challenge for the new BJP government. In the run up to the election, BJP’s Piyush Goyal, widely believed to be a fore runner for a key post in Finance or Commerce, stated that there were enough avenues open to raise capital through dispersed ownership of banks’ equity capital.
Amongst solutions suggested by him are:
- To set up a ‘Bad loan Bank’ that will buy out the stressed assets from Banks at a nominal discount to book value. This would essentially mean that the ‘bad assets’ get nationalised at tax-payers’ cost, while the Banks improve their book value.
- Allow the PSBs to raise fresh equity capital through QIP route rather than Rights issue, resulting in dilution of government holding to below 50%, enabling a re-rating for the PSBs.
- Allow the PSBs to raise capital through the traditional Rights Issue, thereby reducing the value of shareholding of small investors.
Senior economists Jagdish Bhagwati and Arvind Panagariya, widely seen to be the ‘voices of advice’ to the BJP government, are expected to take charge soon and have expressed their positions vis-à-vis reforming the banking sector. What route the government follows will be interesting study but the road to recovery is not going to be easy.
Any measure taken will have to be part of long-pending banking reform and the incumbent government will have to show strong political will to overcome resistance from Bank Unions that will not make implementation of reforms easy. The BJP certainly has the mandate to do it.