Amitabh Tiwari & Subhash Chandra
It’s raining losses for public sector banks and they are scouting for shelter. In FY16, 8 PSU banks (PNB, BOI, IDBI, Canara, Central Bank, BOB, Syndicate and IOB) have posted losses of Rs. 29,000 crores vs profits of Rs. 13,500 crores in FY15. Provisioning for bad loans continued in the fourth quarter of FY16 amid RBI’s directive to clean up the books as India prepares for implementation of Basel III recommendations. Only three banks reported profits, but they also registered a decline in profits (SBI -3,000 crores, Indian Bank -300 crores & UBI -400 crores) on a standalone basis. So the Rs. 25,000 crores provided by Mr. Jaitley for capitalization of banks has already been gobbled by just 6 of these banks.
Govt. owned banks in India are under massive stress and some of them are facing serious existential issues despite assurances by Jaitley & Rajan that all is well and nothing to worry about. Some alarming facts are listed below:
1. Gross NPAs of top 11 PSU banks exceeds Rs. 3,85,000 crores (USD 60 billion or 3% of GDP). Total provision recorded by these 11 banks is greater than Rs. 1,00,000 crores in FY16 alone. Another Rs. 170,000 crores of assets are classified as standard (restructured assets). Chances of these converting into NPAs is high given the current economic situation.
2. 4 banks – PNB, Bank of India, Indian Overseas Bank and Central Bank of India – gross NPA levels are higher than their Tier III capital levels (in % terms). The worst situation is of IOB whose net NPA is even higher than its equity.
3. All these 11 banks have Provision Coverage Ratio way below RBI guidance level of 70%.
What does this mean for the depositors?
Their deposits are safe as of now. Another year of similar provisions will wipe out the equity of some banks, hampering their ability to repay deposits on maturity. This means consolidation is inevitable in the industry. Also means a regime of low interest rates on deposits.
What does this mean for the borrowers?
Forget any respite in the form of low interest rates. Getting fresh loans sanctioned for new projects / development of business would get difficult. Banks could hesitate to on-board new customers. Cost of credit will go up. This explains the slowdown in credit over the last few years. While there was an uptick late last year, growth has slowed down again and is unlikely to recover until the Diwali quarter post a good monsoon.
What does this mean for banks?
Banks will have to raise resources from the markets to shore up their capital. A number of them could see credit rating downgrades increasing their cost of borrowings. Efficiency will suffer in banks as most of the staff will be devoted to watch list and recovery committees, new business will take a hit. Further, given the new media environment, PSU banks are likely to be even more strongly monitored for any poor lending practices therefore putting enormous pressure on senior bank staff. This too will slow down the pace at which PSU banks are likely to lend to businesses.
What does this mean for the owner – the government and people of India?
Given their large size, these banks are systemically important for the Indian economy. The Government may have to use tax payers money to inject more equity to strengthen these banks. Any disinvestment plans of these banks will need to be shelved as any sale will be seen as pulling out and create panic. The Government is using this opportunity to bring down to the number of PSU banks to 10 by merging numerous smaller PSU banks with the larger ones. This is a welcome move as each bank is able to operate with more scale and therefore more efficiency.
What does this mean for the economy?
High NPAs means that banks are likely to be extremely careful while lending which means that we are likely to see lesser growth in investments than the previous year. Separately, low capacity utilization means overall borrowing growth was anyway under pressure. This double whammy has put severe brakes on the economy which is currently growing at 7.5% on the back of excellent FDI growth and low crude prices. However, the silver lining is that a better monsoon is likely to push consumption in the second half leading to better capacity utilization, increased credit growth and a significant push to growth.
Implications for PSU reform
At a larger level, you can look at this as follows – Common man and companies deposit money in banks, PSU banks lend money carelessly to some businesses. Some businesses do not return the money, the bank is in trouble. The Government bails out the bank by using the taxes paid by the Common man and honest companies. Essentially we taxpayers are funding crony capitalism at some level.
a. Companies that borrow but do not pay back
b. The employees of PSU Banks who keep their jobs inspite of poor lending practices
a. Depositors – Who are always in danger of losing their money, particularly if there is a big crisis
b. Tax payers – Whose hard earned money the Government is deploying for unproductive uses
While legitimate business reasons can explain some of the losses, many of the losses are due to poor lending practices. Because politicians indirectly control PSU banks, bank employees are under severe pressure to lend to unviable companies.
There are multiple solutions to resolving this but prime amongst these is privatization. However, Mr. Modi’s strongly believes in PSUs and therefore the Government is focused on reducing direct control of the Banks rather than privatize them outright. In this context, the The Banking Board Bureau was established and will be responsible primarily for improving the overall governance and therefore reducing the poor lending practices in these PSU banks. Whether this works or not, only time will tell. However, it is not impossible for powers to be to appoint their favorites to this board and still manipulate PSU banks. The continued dependency on Politicians makes the process completely beholden to whether we have the right people in Government. The only permanent structural change is when politicians do not have any direct or indirect say on Banking appointments. This means that common citizens of India should own the bank directly, not through politicians and bureaurcats. Privatization of banks will finally reverse the nationlisation of 1971 by Indira Gandhi. The fact is that Nationalisation has had little impact on credit penetration while creating inefficient public sector behemoths. However, given the mindset of the Modi Government, this is unlikely to happen anytime in the future. Until then, we tax payers continue to suffer.