CAG writes to RBI on banks' status post-recap over the past 5 years

Wants RBI to give performance details over the past five years

The Comptroller and Auditor General of India (CAG) has written to the Reserve Bank of India (RBI), seeking details of the performance of state-run banks after their recapitalisation (recap) over the past five years. The CAG has also requested it to share the details of a study, if any, with the government.

“This (development) should be seen in the context of the opportunity cost of state-run banks’ recap, given the limited fiscal space available,” said a source, adding, “It’s probably part of the steps towards sizing the true value of these banks ahead of privatisation and bringing uniformity in the standards for recap.” 

The CAG’s communiqué to the RBI ahead of the 2021-22 Budget also puts the spotlight on the latter’s supervisory architecture. This is because of its linkage with the health of state-run banks, more so after the central bank’s asset quality reviews undertaken in recent years. As articulated by former RBI governor, Urjit Patel, the banking regulator holds that it has relatively less say in the governance of state-run banks. The CAG’s message to the RBI comes within a year of its Report on Trend and Progress of Banking in India (T&P: 2018-19), which noted that “the financial health of state-run banks should be assessed by their ability to access the capital markets rather than looking at the government as a recapitaliser of the first and last resort”.

It had pointed to the deferment of the implementation of the last tranche of the capital conservation buffer of 0.625 per cent to 2.5 per cent by 2019-20. This had given banks an additional headroom of Rs 37,000 crore in capital, on the back of which they could have buoyed lending by Rs 3.5 trillion. The RBI deferred this to 2020-21.

Between 2015-16 and 2019-20, the Centre had pumped in Rs 3.56 trillion into state-run banks — through direct subscription of equity shares (standalone), and recap-bonds — wherein the Centre subscribes to a state-run bank’s preferential capital, and the proceeds are invested by the bank in interest-bearing bonds in a cash-neutral transaction.

The market capitalisation (m-cap) of these banks stood at Rs 4.11 trillion as on December 24, 2020, or 13.48 per cent more than the sum infused during the past five years. “This (m-cap) was well below what was infused for much of this period. It’s gone up recently due to the rally on the bourses,” said another source.

There’s also another matter of detail: the stated net profit of state-run banks falls after adjusting for the interest income on recap-bonds — an issue which was flagged by the RBI in its T&P: 1997-98.

In its letter to the RBI, the CAG referred to its audit of these banks after the recap, which was submitted on July 28, 2017.

The audit had said the Centre infused Rs 1.19 trillion into state-run banks between 2008-09 and 2016-17. In the second phase of the fund infusion in 2010-11, Rs 6,423 crore was pumped in solely on the basis of information received from state-run banks, “without any independent verification by the Department of Financial Services (DFS)”. It said, moreover, the CAG’s audit “could not verify whether the assessments regarding capital requirements made by the DFS were in line with the ICAAP (Internal Capital Adequacy and Assessment Process under the Basel-II Accord) and the Annual Financial Inspection reports of the banks (by the RBI).”

For instance, state-run banks signed memoranda of understanding (MoU) with the DFS in early 2012 for performance-linked capital infusion during 2011-12 to 2014-15. But the achievement against MoU targets were not linked to the actual capital infusion. The basis for working out parameters for it were changed between actual and the estimated values, and often within different tranches in the same year (2010-11, 2015-16 and 2016-17). In 2014-15, there was a shift to “performance-based capital infusion from need-based”, with return on assets being the criteria for the same.

It’s pertinent to note that in its T&P 2018-19, the RBI had for the first time highlighted the sharp fall in both the incremental and outstanding credit of state-run banks. In 2016-17, the share of private banks in incremental credit was almost 100 per cent. This was the same year when a dozen state-run banks were put under its prompt corrective action framework for slipping up on key financial parameters, including capital adequacy. This is seen with concern going ahead too.