More than just capital: Banks' housekeeping woes set to increase

Tucked away in the Reserve Bank of India’s (RBI) Report on the Trend and Progress of Banking (T&P: 2018-19) is the suggestion that it is perhaps time to seriously look at the privatisation of state-run banks. “Going forward, the financial health of these 

banks should increasingly be assessed by their ability to access capital markets rather than looking at the government as a recapitaliser of the first and last resort”. Not explicit on privatisation perhaps, but you can get the drift.

The greater portion of the Rs 70,000 crore given to these banks in FY20 by way of recapitalisation went towards provisioning for bad loans. The situation, going ahead, may be much more of the same. 

The knock-down effects of the RBI’s June 7 circular on the resolution of stressed loans, which calls for a cumulative additional provisioning of 35 per cent, will be fully evident by the end of the first quarter of FY21. The breather given on provisioning for stressed loans to the micro, medium and small enterprises will stand reversed in FY21. Then, you have the build up of stress in the Jan Dhan accounts which had been red-flagged by the central bank a year ago. It would not be out of place to expect an all-round uptick in bad loans.

It is also unlikely the banking regulator will give another deferment on the implementation of the last tranche of the capital conservation buffer (CCB). The deferment of the last tranche of 0.625 per cent from 1.875 per cent in FY19 to 2.5 per cent in March 2020 had left banks with Rs 37,000 of extra capital, on the back of which they could have increased lending by Rs 3.5 trillion. Risk aversion, and poor appetite for credit meant this relaxation was not fully utilised. But it only means that, going ahead, the Centre will have to funnel more capital into state-run banks.

The merger of four sets of state-run banks, which is to be effective from April 1 and their transition issue is another variable to contend with. The mergers will see a rearrangement of a quarter of the country’s banking business in one shot. The June 7 circular will impact this realignment of market share when the merging banks take a consolidated view of stressed accounts. Several banks have been hit or are nearing their exposure ceilings to companies, conglomerates and sectors. Some of the business practices at these banks have been in place for decades, and it’s tough to sort them out in a jiffy.

The stress in the wholesale credit markets saw banks chase retail assets of late. The central bank has already made a reference to the build of delinquencies in retail. It observed that this diversification has its limitations – the wholesale and retail credit markets feed each other; it has to be combination of lending to both segments – and is not to be seen as an “either-or”. “The slowdown in consumption and overall economic growth may affect the demand for and the quality of retail loans”, said the RBI in its T&P.

The solution offered by the central bank is to kick start the capex cycle. It leads us back to the issue of bank capitalisation, and the headroom, or wherewithal, available to continue to do so, going ahead. All of this even as state-run banks continue to lose both incremental and aggregate market share to their private peers, and stare at a fall in valuations ahead.

What has gone relatively unnoticed is the RBI’s observation that in FY19, the Centre’s shareholding in state-run banks went up due to recapitalisation, whereas it reduced in four banks, albeit marginally, and remained constant in three. The capital infusions and the announced mergers of these banks are likely to change the ownership structure further. Furthermore, IDBI Bank was privatised with effect from January 21, 2019, consequent upon the Life Insurance Corporation of India attaining 51 per cent of the paid-up equity share capital of the bank. It could be that the central bank is suggesting that the Centre’s holding in excess of 51 per cent is bought down quickly by letting these banks tap the markets.

A way out could be to look at the “Golden share” option – the Centre can continue to have its “hold” on these banks even as it dilutes the stake to under 51 per cent in state-run banks. While the idea of a “Golden share” is yet to come into public domain, that of differential voting rights – a variant of the same — reared its head in the very first year of the Narendra Modi government’s first term, but it never became a subject for serious debate. That time may well have come upon us.