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Reserve Bank of India has treated Public Sector Banks with kid gloves over the past few months. In its latest move, the central bank has relaxed the Basel III norms by a year.The markets welcomed the move on friday, with CNX PSU Bank index rising by over 4 per cent.
RBI has pushed back phasing of capital conservation buffer (CCB) by a year. Accumulation of CCB would have started from March 2015 and continued to March 2018. It will now start from March 2016 and continue to March 2019. CCB is designed to ensure the banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. Banks can thus delay raising capital by a year.
Markets have naturally welcomed the move, but RBI delaying implementation of Basel III by a year highlights the internal weakness of the banks. RBI in its statement has said that concerns have been expressed by the banking industry on the potential stress on asset quality and its impact on the performance/profitability of banks.
RBI's assumption is that banks, specifically public sector banks, will be healthier only by 2016 and not 2015 in order to raise capital. In other words the central bank does not see the economy improving by 2015, which is contrary to what economists and markets are expecting.
RBI has in the recent past relaxed other norms for banks as well. It had relaxed takeover of infrastructure loans allowing them to be treated as standard assets even if they are rescheduled during the process. Under the current rules, rescheduled loans are treated as a non-performing loan for which provisioning has to be made.
Public sector banks, under political pressure lent heavily to the infrastructure space, an area which private sector banks smartly avoided. Policy paralysis led to a large amount of such infrastructure loans turn bad. Unless these projects were restarted after getting all clearances, a substantial portion of such loans would have turned bad. However, the recent slowdown in economic activity has changed the assumptions made by the infrastructure companies for breaking even. Chances are that these restructured loans might also become non-performing.
RBI has also deferred dynamic provisioning, which would have allowed banks to create a buffer to handle non-performing loans during bad times. But this additional provisioning during current stressful times for public sector banks would have impacted their profitability and liquidity.
RBI's cautious moves though welcome, highlights the ongoing weakness of the banking sector which can only improve with a stronger economy.
