On the chessboard: 2021 will see tectonic shifts in the banking industry

India Inc could make a re-entry into commercial banking - 40 years after the last round of bank nationalisation in 1980

Capital concerns

Recapitalisation of state-run banks may have outlived its purpose. It’s stuck on two counts — very little fiscal headroom, and the low valuations of these banks. While privatisation remains an option, the current low valuations make it unattractive. Between 2015-16 and 2019-20, the Centre pumped in Rs 3.56 trillion into these banks through direct subscription to equity shares and recapitalisation bonds. Their market capitalisation is a tad above Rs 4 trillion. The Centre may have to go in for the bank holding company model. This will also entail governance changes.

This is indicated by the decision to delay the Financial Stability Report due in December 2020 tentatively to January 11, 2021. The Reserve Bank of India (RBI) and the Centre have to be on the same page on the future trend in non-performing assets, as this has a bearing on the recapitalisation amounts state-run banks need.

The more the merrier

On January 15 the RBI will close its window for receiving comments on the recommendation of an Internal Working Group (IWG) that large corporates be allowed to set up banks. The IWG’s report had reviewed the existing ownership guidelines and corporate structure for Indian private-sector banks. If the recommendations are approved, it will mark the re-entry of India Inc into commercial banking — 40 years after the last round of bank nationalisation in 1980.

Many of the biggest industrial groups had been aspirants ever since private players were allowed into banking after 1993. Now, they may once again get an option to seek a banking licence. Forward movement on this front has also to take into account whether it will be altogether new licences that are to be issued — assuming it is decided that corporates are to be allowed to enter — or whether equity-strapped state-run banks are to be put into play.

What now for NBFCs?

The RBI’s IWG also made a case for well-run large non-banking financial companies (NBFCs) with an asset size of Rs 50,000 crore and above (including those within the fold of corporate houses) with a decade’s track record to convert into banks. There are all kinds of shadow banks. Will deposit-taking NBFCs be the first to be waved in? Their view is that, as deposit-taking entities, they operate like banks even without a banking licence. And conversion into a bank would give depositors comfort on the safety of their money, which they may not have with an NBFC.

This raises a question: What about those NBFCs who don’t make the cut for a bank licence? Possibly, only NBFCs that are able to manage liquidity and maintain healthy credit ratings to securitise their portfolios will continue to grow, as they will be able to house assets on their balance sheets. Those who are unable to do so will remain connectors to banks and large NBFCs. Somehow, one gets the sense that fewer such entities will be in the running.

New governance code in private banks

Just what will be the powers of the managing director and chief executive officer (MD & CEO) at private banks? Prolonged talks have been on between the industry and the central bank on the draft code on governance. The RBI is categorical that corner-room occupants must not have a seat on key board committees, such as those overseeing remuneration and nomination; audit; and risk management. Also, senior officials are to report to board-level committees and not to the MD & CEO.

Bank bosses fear this dilutes their position, as section 10B of the Banking Regulation Act states the incumbent is to be entrusted with the management of the whole bank. It also affects the board’s ability to induct nominee directors who among themselves are entitled to exercise over 20 per cent of total voting rights. A few large institutional investors have sounded out their legal advisors on the draft governance code’s implications, were it to become operational as it stands. This also has implications for governance structures in banks of all hues.

... and the IBC will kick in, too

The government suspended fresh initiation of insolvency proceedings in respect of defaults arising during the 12-month period commencing March 25, 2020, to shield companies impacted by Covid-19. If this relief is not extended afresh, the Insolvency and Bankruptcy Code (IBC) will kick in again.

Senior bankers say stress has been accumulating in the system since the pandemic struck, and the process of arriving at a consensus on the resolution of Covid-induced stress must be fast-tracked to avoid further stress build-up at the end of the suspension period, and to clear the existing backlog of insolvency cases. In 2019-20, the amount recovered through the IBC and debt recovery tribunals was Rs 1.72 trillion, or 23.2 per cent of the sum involved. This was better than the Rs 1.18 trillion, or 16.3 per cent, seen in 2018-19.