From financials to people issues, 2019 may well be the year of reckoning

With the dawn of a new year, a complete review of a few long grid-locked issues will be on the cards. Be it the recapitalisation of state-run banks, leadership concerns, reluctance on the part of banks to recalibrate their business models, the way they go about their off-site servicing of customers, or staffing and human resource problems. Outlined are the top five problems that will engage us down the road.

Two cheers are enough

At long last, the Centre decided to infuse an additional Rs 830 billion into state-run banks, up 63 per cent, taking the total corpus to Rs 1.3 trillion for FY18. It’s time for cheer, but do remember that since the start of the clean-up act from FY16, about Rs 3 trillion has come in by the way of recapitalisation and much of it has been eaten up by provisioning for dud-loans — not towards growth. Gross non-performing assets (NPA) have moved southwards from March 2018, by Rs 238.60 billion in the first half. 

Special mention accounts, which are overdue by 31 to 90 days and not non-performing, fell by 62 per cent over five successive quarters to Rs 0.87 trillion as of September 2018 from Rs 2.25 trillion in June 2017. 

The current infusion was to get the dozen banks quarantined under Mint Road’s Prompt Corrective Action framework to get walking. What needs to be watched out for are the financials of these banks for the last two quarters of FY18—it’s entirely possible the March figures may not reflect the improving trendline for the first half of the fiscal as these are not audited figures as of yet. 

If the bulk of the infusion is towards provisioning, we will soon be on familiar territory all over again. And the case for differential voting rights in state-run banks, which reared its head in the early part of this government’s tenure, will be up for discussion again.

A weaker term-deposit franchise

A major shift in banks has been the low growth in their term-deposits. Post-demonetisation, deposits of all hues surged as cash floated into banks but it hid a tectonic shift. The Reserve Bank of India (RBI) had flagged off the issue in its Report on Trend and Progress of Banking in India for 2016-17, when it noted that deposit growth was led by current and saving accounts, while that in term-deposits was muted. It attributed this in part to lower credit growth (banks did not chase term-deposits on deployment woes) but, below the radar, it is the low returns when compared to mutual funds and insurance products with tax-efficient returns. 

A recent report by CLSA noted: “They (banks) are resorting to non-deposit funding sources (including bonds and refinancing) which formed 30 per cent of incremental deposits in FY18 versus 11 per cent in FY17.” 

This, CLSA added, poses a structural risk to lenders. It went on: “We expect segment growth to lag that of credit, while the shortfall will need to be met via wholesale deposits and bonds.” Simply put, bank margins will come under more pressure. It has the potential to lead to a “higher new normal” for good by way of disintermediation. 

Beyond the big corner room

The country’s longest serving private bank heads will be in the final phase of their stay at the crease—Aditya Puri of HDFC Bank and Romesh Sobti at IndusInd Bank. What doesn’t get enough attention is whether the senior team at these banks will stick together after the baton change. In the past, ICICI Bank saw an exodus after Chanda Kochhar took over from K V Kamath. Of particular interest will be the developments at IndusInd. It is widely held that one of three—Paul Abraham (chief operating officer), Sumant Kathpalia (head-consumer banking) and Suhail Chander (head-corporate and commercial banking)—will make it. That said, what’s also interesting is that the entire 15-strong core team (barring two) are from ABN Amro Bank and had walked in with Sobti in 2007. 

As for Puri, he is among the longest serving CEOs in the world: Joseph Neubauer led Aramark for 31 years; Ray Irani did so at Occidental Petroleum for 21 years (if you were to look outside the list of promoter-bosses). It leads us to a related issue, more so due to the upcoming change to be affected at Rana Kapoor’s YES Bank. 

Are we looking at reduced terms for CEOs at private banks, say not more than two-terms? Don’t be surprised if this were to happen.

Whose swipe is it anyway?

Everyone punched in the wrong code at the ATM:  managed service providers, cash-in-transit firms, ATM vendors, and private equity firms that backed them. And all are out of cash. It’s one headache that will not go away anytime soon as it’s now a turf-battle among stakeholders. 

A breather will be if the interchange fee (what a bank earns when the customer swipes the card of another issuer) is restored to its earlier level of Rs 18, but it will not go far as the actual cost is closer to Rs 22. Logistics costs are set to zoom after Mint Road’s exacting circular of April 6: “Each cash van should have tubeless tyres, wireless (mobile) communication and hooters. The vans should not follow the same route and timing repeatedly so as to become predictable.”  The industry is now veering around to the view that banks will have to share the burden for running the 240,000 ATMs if the Rs 15 inter-change is to hold even as existing servicing contracts will have to be reopened. At stake is the financial inclusion dream—ATMs are a key cash-out point in direct-benefits-transfer. The next quarter will see longer queues at the cash till. Something’s got to give.

People issues

Bank strikes will be upon us. Talks between the Indian Banks’ Association (IBA) and the unions have faltered, despite talks being on for over a year over the 11th Bipartite Wage Settlement. The bankers’ lobby has offered a wage revision of 8 per cent. The  unions want more. In the last revision, they got 15 per cent. We may well be seeing the last days of industry-wide negotiations. 

Already five state-run banks want negotiations to be restricted to officers up to scale-3, which the unions claim is a departure from the past. The reports of the G Gopalakrishnan Committee (2014) and A K Khandelwal Committee (2010) clearly state what needs to be done to create bench strength, attract and retain talent, given the rapid changes in the banking world. 

While the unions have steadfastly refused to accept bank-specific settlements, the one-size-fits-all approach may be on its last legs. The shift may well be engineered by the better among the state-run banks, some of which can afford to pay more to their staff than under the bipartite agreement that has held sway since 1966.