<b>Subir Roy:</b> Stepchild of Union Budget

If there is one sector which the Budget has passed over, it is NPA-ridden public sector banks

If there is one sector which the Union Budget 2017-18 has virtually passed over, it is non-performing asset (NPA)-ridden public sector banks. A paltry Rs 10,000 crore has been allocated for the recapitalisation (last year it was Rs 25,000 crore) when, according to an estimate by S&P, the requirement is Rs 2.5 lakh crore. 

After the Budget, Arvind Subramanian, chief economic adviser, said he considered the toxic assets of banks an “intractable” problem as they go hand in hand with companies which are not healthy. There has to be a “political will” to solve this problem, which cannot be left in the hands of mid-level bank managers. Finance Minister Arun Jaitley has added that an institution to tackle bank NPAs and overleveraged companies (a “bad bank”) could not be funded by the government alone though he would not dismiss the idea. As banks are saddled with huge NPAs (Fitch puts the stressed assets ratio in 2016-17 of all banks at 12 per cent) and low capital adequacy, their ability to give further loans and thus promote investment is suffering. 

In the two and a half years that the National Democratic Alliance government has been in power, it has effectively worked on a single solution — merge many of the 27 public sector banks to eventually form around half a dozen well capitalised large ones. Towards this end, as also to find them good top manager and put a buffer between them and the government to improve governance, the government has appointed the Banks Board Bureau. But despite this board, under former comptroller and auditor general Vinod Rai, being around for a year, all options still remain on the table. Even the merger of the State Bank of India with its remaining associate banks is yet to happen. This is when it remains doubtful if smaller banks, with local knowledge and grassroots presence, should be merged into a bureaucratic behemoth.   

Meanwhile, two recent developments have raised the issue of what state-owned banks can do today, which private entities cannot. After bank nationalisation, the government took banking to a large section of the people through rapid branch expansion. But that went so far and no further. Seeing the gap that remained in achieving financial inclusion, the Reserve Bank of India issued small financial bank licences to well-run microfinance institutions prospering by doing what public sector banks could not — give small unsecured loans to poor women, achieve a very high rate of recovery and grow rapidly. The new banks’ mandate is to take banking into still unbanked areas. 

How big this space is was revealed by the severe negative impact that demonetisation had on microfinance institutions, indicating that the country’s rural, and to an extent urban poor, still mostly deal only on cash and have to trudge long distances to reach a bank branch. This is because banks have opened rural branches in officially designated unbanked areas, which are really peri-urban. I recently attended the opening of a branch of a microfinance institution on an important road on the outskirts of Kolkata where banking was absent over a close to 10-km stretch. 

The reality is that public sector banks have outlived their historical developmental role and the sooner they cease to be publicly held, the better it will be for the system. Otherwise, it will be pouring good money after bad. According to Fitch, all banks taken together will need $90 billion (Rs 6 lakh crore at current rates) to meet Basel III norms. If we assume the public sector banks’ capital requirement is upwards of 70 per cent (their share of the total banking business), then it works out to close to 30 per cent of the total projected revenue of the central government for 2017-18! Is there a better way of spending this kind of resources, in areas like health and education? 

What is the way forward? The government can simply go on with business as usual, as it has been doing, and wait for the global and national economy to go on a robust growth path again. Just as the twin balance sheet problem grew out of the global financial crisis of 2008 that ended the previous boom, the banks’ problem will go when the next global boom comes. But as Mr Subramanian has himself admitted, the “status quo has not worked.” 

Another option is to go in for mergers and recapitalisation while running the banks more or less the same way they have been. It is doubtful if after several years of this, things will be any better. The third option is strategic sale right now. This, other than being politically tough to digest, will find takers only for the better public sector banks. What happens to the rest?  Not so long ago, I asked the chief executive of Bandhan Bank, the only microfinance institution to become a full-fledged bank which appears to be sailing merrily, if he would take over the United Bank of India if it were offered to him? He did not answer the question. 

The only path open right now is to foremost go in for massive use of information technology to greatly enhance employee productivity and push voluntary retirement. Simultaneously, wait for the Banks Board Bureau to come up with a better crop of top managers who will improve governance and help in bettering asset quality. The great asset of public sector banks is their branch network and you still need well-run branches to enhance customer relationship when financial inclusion is being pushed forward. The hope will be that after a period of this, there will be takers who will offer a decent price to enable the government to put behind it a part of history. 
 

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