Sensible caution

The banking regulator has made a sensible revision of the norms governing payout by banks for 2003-04. Under normal circumstances it is the management of the bank which should determine how to keep public shareholders happy while keeping the business healthy.

But in many cases the majority shareholder, the government, has abdicated its role of supervising the managements. Hence, it has fallen upon the Reserve Bank of India to play the role of cautious supervisor so as to ensure systemic health in the financial world.

A key norm, that banks whose net non-performing assets ratio (as a proportion of total lending) has been above 3 per cent in any of the last three years should get RBI's approval before paying a dividend, has already been in place.

What is partially new is raising the permissible risk weighted capital adequacy ratio from 9 per cent to 11 per cent, in keeping with the new Basel norms.

The entirely new provision is that the payout should not exceed a third of the net profit. Banks which do not meet these norms can still pay dividends, but only after taking permission from RBI.

There is need for regulatory caution because of several reasons. One, some present bank managements have not been acting in an entirely responsible manner. Witness the way some of them loosely talk of acquisitions that can have a volatile impact on their share prices.

Second, bank shares are on a roll and it is important at this point that a stock market bubble is not created. It is good that public sector bank managements have lately become conscious of bottom lines and valuations.

But the downside is that some of them start focusing on improving valuations quickly, during the head man's tenure which is often quite short.

It is also important that banks provide for a rainy day. The era of falling interest rates is certainly over and banks will not be able to benefit from treasury profits in the foreseeable future, as they have in the recent past.

Besides which, banks need more capital as they expand and grow, and retaining a certain proportion of profits helps to finance growth without having to go back to shareholders for fresh capital.

Interestingly, there are some large banks that will not meet the norms. Big banks which posted a net NPA of above 3 per cent in 2002-03 include State Bank of India, Punjab National, Bank of Baroda, Indian Bank, Central Bank and ICICI Bank.

As against this, there are several small banks which did well, including Oriental, Corporation, Andhra and State Bank of Patiala.

In the last financial year (2003-04) many more banks, some big ones among them, will be able to take their net NPA to below 3 per cent but once is not enough. The big players have a historical baggage of dubious assets run up with large corporates during the days of directed lending.

The smaller players, by not being included in consortia for large loans, have been spared the trauma. Today, with the coming of retail lending, the small are lending aggressively and shining.

But many of these loans, which are still regular as they are not very old, can become of dubious value over time. In other words, some caution will not do any harm.